The Public Service Pensions and Judicial Offices Act 2022

The Government accepts that affected members of the reformed pension schemes who have retired since 1 April 2015 or will retire before the remedy has been implemented, have an entitlement to be treated as a member of their legacy scheme for the remedy period if they wish.

However, giving effect to this entitlement before legislation is implemented creates complex issues, particularly where there are interactions with the tax system.

The PSPJOA 2022, together with changes being made through tax regulations using powers in the Finance Act will ensure a consistent approach and mitigate the risk of adverse tax impacts for members once they are commenced through scheme regulations.

These scheme regulations will be in place by October 2023 for all members. 

Provisions for the deferred choice will be implemented by 1 October 2023 for all active members who retire beyond this point. Schemes will also offer those who have already retired a choice of benefits for the remedy period as quickly as possible after scheme regulations are implemented.

Some Fire and Rescue Authorities may have chosen to process cases ahead of legislation, where this is the case, they will need to be revisited. 

Where members retire before the deferred choice is implemented in their pension scheme, they will initially receive benefits from their current scheme.

They will then be given a choice of benefits for the remedy period as quickly as possible after that and any increased entitlement will be backdated. Interest will be applied to backdated payments.

No. There are still detailed changes that need to be made to scheme regulations. These will be made using the powers in the PSPJOA 2022 and need to be in force by 1 October 2023 at the latest.

There are also some situations where changes to pension rights due to the remedy produce disproportionate tax results that cannot be resolved through powers provided in the PSPJOA 2022.

Therefore, the Government will also be making changes to tax legislation to ensure that the remedy can be implemented smoothly. The Government is intending to finalise these regulations by Autumn 2022 with a public consultation planned in Summer 2022.

Together with changes being made through tax regulations using the powers in the Finance Act and scheme regulations made under the Act, the PSPJOA 2022 will provide a remedy for all those affected by the discrimination identified by the Court of Appeal.

This remedy will apply equally to claimants in the employment tribunal and non-claimants and there is no need to make a claim to the employment tribunal to benefit from the changes.

The cost control element of the 2016 valuations was not completed prior to the pause, as a result of the McCloud and Sargeant judgments.

Government felt that it was appropriate to pause the mechanism at this time as the uncertainty arising from the judgments made it not possible for them to properly assess the value of member benefits at the 2016 process. 

While provisional results prior to the pause showed that a number of schemes would breach their cost control floors, these were never finalised and did not take into account the increased value in members’ benefits as a result of remedy.

If the cost control mechanism had not been paused, schemes may have adjusted benefits based on incorrect assumptions about benefit entitlements. The Government Actuary agreed that the policy of pausing the mechanism was reasonable.

Schemes are required to complete valuations by law.

Given this requirement, it is appropriate that these are completed based on an accurate assessment of the value of schemes to members, which necessarily includes remedy.

Failing to capture the value of remedy could mean that members’ benefits are changed based on an incomplete and inaccurate assessment of the value of these pension schemes.

This would represent an unacceptable risk to the taxpayer, would introduce volatility into the mechanism at future valuations, and would fundamentally undermine the stated purpose of the mechanism to fairly assess the value of schemes to members in a way that is consistent and transparent.

The 2016 valuations are not affected by the proposed reforms.

These 2016 valuations have been completed in line with the original design of the cost control mechanism.

The proposed reforms to the cost control mechanism follow the Government Actuary’s review of the mechanism and a full government consultation process. The Government asked the Government Actuary to review the mechanism in 2018 following the provisional results of the 2016 valuation, which raised concerns that the mechanism was too volatile, and was failing to operate in line with the intention that it should only be triggered by “unpredictable and extraordinary” events.

The 2016 valuation process had already begun before the review was commissioned. The 2016 process was paused due to the uncertainty which arose from the McCloud/ Sargeant judgments, and the Government Actuary’s review was also put on hold at this time. Once the Government announced that the 2016 process would resume, it also confirmed that the review would proceed. However, as it was not clear what the outcome of the review would be, it would not have been appropriate to take a decision on whether or how the mechanism should be reformed for the 2016 valuations.

The reforms to the cost control mechanism will be implemented in time for the 2020 valuations.

In September 2018, the Government announced it would commission the Government Actuary to undertake a review of the cost control mechanism because of concerns it was not operating in line with its objectives. Specifically, there was concern about the stability of the mechanism, since breaches were only expected to be triggered by extraordinary, unpredictable events.

The Government decided that it would be inappropriate to reduce member benefits based on a mechanism that may not be working as intended.

The PSPJOA 2022 therefore contains a measure to ensure no member benefits will be cut as a result of the 2016 valuations.

As a result of the decision to waive any ceiling breaches, no member will see a reduction in pension benefits at the 2016 valuations. 

HM Treasury published amending directions in October 2021 which will allow schemes to complete the cost control element of the 2016 valuations and specifies how this should be done. Outcomes for individual schemes will not be known until results have been finalised.

The intention was for the mechanism to only be triggered by unforeseen and unpredictable events. In 2018, the Government Actuary was asked to review the mechanism after the provisional results at the 2016 valuations suggested the mechanism was too volatile and not operating in line with its objectives. The review commenced in 2020 and the final report was published in June 2021. It contained several recommendations on how to improve the mechanism.

Following a full public consultation process, the Government confirmed in October 2021 that it would take forward three reforms to the mechanism in time for the next scheme valuations. All three reforms are recommendations by the Government Actuary. The reforms will make the mechanism more stable and ensure that it protects both scheme members and taxpayers.

By moving to a reformed scheme only design, legacy scheme costs will be excluded from the mechanism, and only costs relating to past and future service in the reformed schemes will be considered.

A reformed scheme only design will ensure consistency between the set of benefits being assessed and the set of benefits potentially being adjusted. It will also increase the stability of the mechanism and reduce intergenerational unfairness. While this transfers the risks associated with legacy scheme costs to the Exchequer, the Government believes this is the right approach to take in order to reduce intergenerational unfairness and ensure the mechanism is fairer to younger members who did not previously have access, or had access for a shorter time, to the legacy schemes.

The Government believes that by creating a more stable mechanism, which limits intergenerational unfairness, and which remains symmetrical, these reforms benefit both members and taxpayers.

The Government’s reforms will make benefit cuts and increases less likely, in line with the mechanism’s original objective of stability and the intention to protect both member benefits and the taxpayer. A more stable mechanism should provide greater certainty to scheme members regarding their future benefits.

The 2016 valuations were the first time the mechanism was tested, and the provisional results suggested there would be breaches across the board. As a result, the Government was concerned this indicated the mechanism was not operating as intended and was too volatile.

For this reason, the Government commissioned the Government Actuary to carry out a review of the mechanism to assess whether it was too volatile and if it was operating in line with its objectives.

The Government Actuary’s final report was published in June 2021. The Government considered the final report and concluded that changes were necessary to ensure the mechanism operates more in line with its objectives, and then put these changes to consultation.

All the Government’s reforms proposed in the consultation were recommendations made by the Government Actuary.

The Government aims to implement these reforms to the cost control mechanism in time for the 2020 valuations. It would not have been possible or appropriate to implement these reforms, including the reformed scheme only design, in time for the 2016 valuations.

The 2016 valuation process had already begun before the review was commissioned. The 2016 process was paused due to the uncertainty which arose from the McCloud/ Sargeant judgments, and the Government Actuary’s review was also put on hold at this time. Once the Government announced that the 2016 process would resume, it also confirmed that the review would proceed. However, as it was not clear what the outcome of the review would be, it would not have been appropriate to take a decision on whether or how the mechanism should be reformed for the 2016 valuations.

Some members will see no changes to their tax position as a result of the remedy or will receive a refund as a result of the remedy.

In the instances where your tax liability does increase, in the vast majority of cases this will reflect an increase in value of your pension benefits.

As the remedy relies largely on a member’s choice, which will differ depending on their circumstances, it is not possible to give a meaningful estimate of the number of tax corrections needed as a result of the remedy.

The tax system will in most instances work in the usual way and follow the new pension rights accrued from the remedy taking effect. There are some situations where changes to pension rights due to the McCloud remedy produce disproportionate tax results that cannot be resolved through powers provided in the PSPJOA 2022.

Therefore, the Government will be making changes to tax legislation, using provisions contained in the Finance Act that received Royal Assent on 24 February 2022, to ensure that the remedy can be implemented smoothly.

The Government is intending to finalise these regulations by Autumn 2022 with a public consultation planned in Summer 2022.

When individuals are moved back into their legacy schemes, they will be legally entitled to receive legacy benefits for remedy period years – and that needs to be reflected in their tax treatment.

In some cases this is likely to result in a refund of overpaid tax and/or compensation, rather than additional tax being due. If an active or deferred (someone who is no longer building up entitlement) member then chooses new scheme benefits when they retire, those benefits will be adjusted at that point – not with retrospective effect.

Where the choice of new scheme benefits which arrive all at one point means a higher tax bill that year than if the individual had chosen to keep legacy benefits for remedy period years, the Government will intervene – given the design of the remedy here could trigger a disproportionately high tax charge.

Where possible, the Government and schemes will take proportionate steps to minimise the administrative burden on members. Ultimately decisions made by members will be individual choices.

There will also be further guidance to complement existing HMRC guidance and schemes’ processes which are already in place to help individuals with their tax affairs.

Schemes will also be able to provide compensation where a member has incurred reasonable additional costs as a result of an agent, i.e. where receipts or invoices can be provided by a tax adviser or accountant, who helped to resubmit information to HMRC.

In practice, most individuals will not have to correct their position, either through the tax system or by claiming compensation. For those that do, the Government has worked hard to remove additional burdens that arise from addressing the discrimination.

Where possible, the Government and schemes will take proportionate steps to minimise the administrative burden on members, but it will not be possible to completely remove individuals from this process in all cases.

If as a result of the remedy an individual has less tax to pay, they will be able to claim a repayment of overpaid tax from HMRC. The Act allows them to claim compensation if they are unable to get a repayment through the tax system.

The Government acknowledges the need to provide clear and accurate information to members going through this process to enable them to take the required actions. There will be material to support individuals through this process, guidance and calculators. Schemes will also be able to provide compensation where a member has incurred reasonable additional costs as a result of an agent, i.e. a tax adviser or accountant, having to resubmit information to HMRC.

This is a unique set of circumstances that the government is addressing. The legislation and scheme rules covering public service pensions were not created with a view to making retrospective pension provision. So the changes made by the PSPJOA 2022 and other legislation are not straightforward but, as far as individuals are concerned, the complex changes are being made ‘under the bonnet’.

Individuals will have a choice to make, and they will have the necessary information available to them when they come to do so. The majority will be provided with a simple choice between two options.

However, for some, correcting individuals’ pension positions over past years and getting it right, plus getting their tax liability correct, is not straightforward. The Government acknowledges the need to provide clear and accurate communication and information to members going through this process. There will also be further guidance to complement existing HMRC guidance and schemes’ processes which are already in place to help individuals with their tax affairs.

Schemes will be able to provide compensation where a member has incurred reasonable additional costs as a result of an agent, i.e. a tax adviser or accountant, having to resubmit information to HMRC.

The PSPJOA 2022 contains the core remedy. It sets out what the core remedy will mean for member’s contributions, benefits, pension payments and compensation.

Some elements of the Act concerning contributions, timing of changes to pension rights, and deeming provisions regarding which schemes are making or receiving payments, have been included to ensure proportionate and reasonable tax outcomes, in line with policy set out in the consultation and published response document.

The tax system will in most instances work in the usual way and follow the new pension rights accrued from the remedy taking effect.

There are some situations where changes to pension rights due to remedy produce disproportionate tax results that cannot be resolved through powers provided in the PSPJOA 2022. Therefore, the Government will be making changes to tax legislation, using provisions contained in the Finance Act that received Royal Assent on 24 February 2022, to ensure that the remedy can be implemented smoothly. The Government is intending to finalise these regulations by Autumn 2022 with a public consultation planned in Summer 2022.

Treasury directions are intended to set out to schemes how they should exercise a particular power, rather than creating a new power.

They ensure that, where Treasury ministers, who are responsible for policy on public service pensions, consider that a consistent approach is necessary or desirable, the Treasury may give directions to schemes, as other departments are responsible for preparing and laying scheme regulations.

This allows schemes to make regulations that work best for them, while ensuring that where a particular outcome is desirable, it is achieved.

This is in line with the normal use of Treasury directions in this way, for example directions in relation to scheme valuations, or for increasing public service pensioners’ Guaranteed Minimum Pensions when they would not otherwise be increased.

Treasury directions are already often given to public bodies on technical matters such as their financial and accounting procedures – this is a consistent approach.

The Act is broadly being handled in the same way as pensions legislation has been dealt with in the past.

Treasury directions are just one part of the process. Much of the detail will be set out in the secondary legislation and will be subject to the usual parliamentary processes.

Treasury directions will be made public in advance of schemes making their retrospective regulations.

There are no specific requirements in legislation for any formal, public consultation on the Treasury Directions which will set out how schemes should implement elements of the retrospective remedy (i.e. those in Chapters 1,2 and 3 of the PSPJO Act).

The policy content of these Directions will be settled ahead of the public consultations schemes will undertake on their retrospective regulations. These consultations will therefore be the main mechanism for providing feedback on the detail of how the retrospective remedy will be implemented, which can then be considered before the Treasury Directions and retrospective scheme regulations are made.

The Government has introduced primary legislation through the PSPJOA 2022 to implement a deferred choice underpin within schemes. All eligible members will be treated equally and will be able to choose to receive pension scheme benefits from either scheme. Where necessary, payments will be backdated to 2015.

Provisions for the deferred choice will be implemented by 1 October 2023 for all members. 

Schemes have carried out consultations on more detailed scheme-specific changes to prospective regulations and will carry out consultations on retrospective scheme regulations.

Where the changes legislated for through the Act produce disproportionate tax results that cannot be resolved through powers provided in the PSPJOA 2022, further changes will be made in the tax and scheme regulations.

The Government intends that the provisions for the deferred choice underpin will be implemented by 1 October 2023.

Scheme regulations to move members to the reformed scheme from 1 April 2022 have been recently consulted on, and were laid in March. These ensure members are placed on an equal footing from this point onwards.

Additional scheme regulations will be drafted and consulted on over the next 18 months. These regulations will be used for the various purposes listed throughout the Act, including the process by which a member can make a choice or “election” to receive new scheme benefits, for interest to be paid to a member or scheme on any amounts owed to or by the scheme, to make provision for pension credit members, to make provision for members to receive remediable service statements, to provide for members who have made additional voluntary contributions and for members who have already benefited from an immediate detriment remedy.

Where it is particularly important that scheme regulations are consistent, the Act will require them to be made in line with Treasury Directions. The powers to make scheme regulations are explained in the Delegated Powers Memorandum prepared by HM Treasury for the Delegated Powers and Regulatory Reform Committee.