Police pensions: Transcript from Federation open meeting

ESSEX Police Federation Open meeting heard from police pensions expert John Sturzaker (pictured) about the new scheme being introduced in 2015.

Mr Sturzaker, from Slater Gordon, advises the Staff Side of the Police Negotiating Board. Here is a 4,000 word transcript of the session from Mr Sturzaker for those that could not make it. Click here/see below for more.

The regulations of the new scheme are not yet available. Pension schemes are complex things and ultimately detailed rules are found in the regulations. The regulations in the 2015 scheme are not available yet even in draft. So all that you can be given by me or anybody else is a best understanding of the position. That is not to say that anything I am about to tell you is going to change. The Government and the Home Office have issued quite clear [updates] about what the elements of the new scheme [are] going to be. However, it does mean that some of the fine points of detail, some of the things that you may have questions about, we may not know the answer to until the regulations are available.

One thing that I would emphasis is that anybody who is thinking about taking a step in relation to their pension, should always before they do anything, get specific confirmation to the extent that they can about their personal situation from the force pension administrator. I will say something about opting out – and if anyone is thinking about it – I will say almost repeatedly that it is a very bad idea. If anybody is thinking about that you must make sure that you get good, independent financial advice before you opt out. I hope to bring out some of the features of the new scheme and the transitional arrangements which are perhaps not as bad as people think. I make no bones about it, this scheme is not as good as the current scheme, but it may not be as bad as you think in certain respects. Anyway, you’ll draw your own conclusions.

So how the new scheme works: The first thing to note is that the current schemes – the 1987 scheme and the 2006 scheme are very easy to understand. They are final salary schemes. What you get as a pension is a fraction of your final salary and you can see in advance is a very clear idea of what your final pension is likely to be. It is very easy to understand that kind of pension scheme. This [new scheme] is not a final salary scheme. It is called a CARE scheme – a career average revalued earnings scheme and the reason for that is because it is based around your earnings throughout your career, revalued with the index rate, as you’ll see.

What happens with the new scheme is that each year you earn a slice or a pot of pension. The starting value for that slice is your pensionable value multiplied by the accrual rate. The accrual rate is going to be 1 over 55.3. So you multiply your pensionable salary – how much you earn – by that rate. What then happens is every year, every slice you have is index linked and that rate and uprated – increased in value by CPI plus 1.25%. And that’s done on a compounded basis. So if you have three pots, the first pot will have been uprated three times by the third year. The pension that you get is then a pension that is payable for life which consists of the total number of each of those slices at the time that you retire. Once you retire, or if you leave the scheme, then the uprating is at the rate of CPI only, not CPI plus 1.25%. CPI is a measure of inflation, it’s the consumer price index. The measure isn’t just CPI, its CPI plus 1.25%. Over years an extra 1.25% on top of inflation is a big difference.

The affect of compounding over any period of time makes a big difference. So the 1.25% although it doesn’t sound very much is actually very beneficial. And obviously if CPI is 3% then the indexation of all the slices that year will be 4.25%.

CARE scheme in reference to final salary scheme has a number of obvious implications. The first one is that your pension is no longer a fixed percentage of your final salary. So it is not as easy to visualise and understand as the current schemes. The level of the pension will depend on the final total value of the slices. That in turn will depend on how many years’ service you have, how many slices you’ve got, what your salary has been each year, what the level of CPI has been each year – but this is an important point; although it is not a final salary scheme, it is still what pension experts refer to as a defined benefits scheme. What that means is that for members of the scheme there are no elements of investment risk. The benefits are guaranteed and the benefits can be worked out by reference to a fixed formula. It is not dependent on the performance of investment and that is a big thing.

A very important aspect of any scheme is what is called the pension age – the age at which you can actually draw a pension and start taking the pension that you’ve earned. Pension age for this scheme is 60. The preferred pension age, which is the age you get the pension if you leave service, is state pension age. State pension age is due to rise to 67 and then to rise to 68. But, and this is a big but and is very important, if you serve until the age of 55, you can take your new scheme pension immediately.

It will be reduced – it will be a lower amount, it will be actuarily reduced – and that reduction will be calculated from 60. But you can take an immediate pension at 55. The numbers that we are talking about here are for the new scheme.  So that means that your new scheme pension, if you leave before 55, your CARE pension, your new scheme pension, will be payable at state pension rate. If you leave at 60, your new scheme pension, will be payable immediately at no reduction. If you leave after 55 your new scheme pension is payable immediately but it will be at a lower amount, actuarily reduced from 60. You will in addition to that get your pension under the 87 scheme or the 2006 scheme. I mentioned actuarial reduction – the concept is you get a lower pension paid for longer. The value of the payments you get are the same – actuarily assessed – but it is a lower amount because it’s paid for longer. The Home Office estimate is that you get four or five reductions but each year that the pension is taken earlier. Be clear that the reduction is permanent. It is not just a reduction until the age of 60.

In terms of commutation, the new scheme is like the 87 scheme in principle in that there is no automatic lump sum and no automatic commutation. You can take a lump sum. It is an option – it is a fixed option. It is not like the 87 scheme, which is based on actuarial factors that are very good. It is a fixed commutation at the rate of 12 to 1. That means that each pound of the pension you give up, you can take a lump sum of £12. It is important to emphasise, for those of you that are members of the 87 scheme, that your 87 lump sum is not calculated on the same basis. That will continue to be calculated on actuarial factors.

There are quite extensive and quite complicated transitional arrangements. Members fall into three categories – the first is people who are fully protected. If you are fully protected, you simply stay forever in your scheme – the 87 or the 2006 scheme. If you are partially protected, you will join the new scheme but will you join after the 1 April 2015. If you are outside protection completely, then you will join the new scheme on the 1 April 2015. And those joining the new scheme – the last two categories, will have accrued rights, the rights they have already got from the 87 or 2006 scheme – those rights are protected. In order to be fully protected, members had to be on the 1 April 2012, either aged 45 or over or in ten years of a full pension, which means 20 years in the 87 PPS or 25 years’ service in the 2006 PPS. Or to be in a position where they would have been within ten years of pension, if any part of the service has been full time service. The tapering protection is broadly anyone that falls within four years of full protection.

The reason for tapering protection is to stop a cliff edge. If you didn’t have tapering protection, it would mean that if you are born on one day – if your age was right, you’d be fully protected but if you were born the day after you would get nothing. So tapering works on a tapering basis. The closer you are to full protection, the more protection you get. And the maximum additional period, for someone in tapering protection can get, is seven years membership of the old scheme. Seven years running to 1 April 2015. And the details of tapering protection is set out in some tables attached to a document called the Reform Design Framework document which is available on the Home Office and Police Federation website under the pension section and that sets out full details of how tapering operates. You can read down and see where you sit in relation to that.

It is important to emphasis some points about accrued rights. As already said, members will full protection scheme so pension 14 doesn’t affect them at all. But members who are serving on 31 March next year who joined the CARE scheme either immediately on 1 April or after tapering protection – they will end up with two pensions. They will end up with a CARE pension, based on what I have just said, and they will end up with a pension that looks like their accrued rights. That is the pension that I am talking about at the moment.

There are three important protections for accrued rights. The first is that your old scheme pension will be calculated by reference to your final salary. It is not the salary at the point you move across, uprated by inflation, it is your final salary at the point you retire. And that can be very, very important for some people – particularly where you get to promotion for example. But also the effects of pay rises to be anticipated over time should make a big difference as well.

There is also something called weighted accrual for members of the 87 scheme. Those of you who are members of that scheme will be aware of double accrual – for the first 20 years of your service you’re meant to get 1/60th and the last ten years you get 2/60ths. People who are going to move across to the new scheme are going to miss out on the ability to get double accrual. So what is included in here is some compensation for that, and the concept of weighted accrual, which means that the fraction you get, the accrual rate can get to improve from sixtieths up to forty fifths. It makes a lot more sense when you see an example. It is also important that pension ages – the age at which you can draw your 87 or 2006 scheme pension – those pension ages will still apply to your accrued rights.

In order to fully benefit from the accrued rights you have to remain a member of the new scheme. If you opt out of the new scheme then your accrued rights protection is severely compromised in that you will lose the pension age – the ability to draw your pension at 30 years service or 25 in the 87 scheme – you will lose the access to weighted accrual and you will also lose the link  to your final salary as well. It is also the case with accrued rights that you have to retire to access the pension.

The precise implications of opting out depend on specific circumstances of the individual concerned. If you opt out you will lose any future protection for your accrued rights. And these are significant protections to be given up and once you lose them you lose them. You opt back in you won’t get them back. Generally, opting out is a very bad idea. And as I said before, anyone thinking about it needs to take very good independent financial advice.

The first thing the Police Federation and the staff side PNB [did after plans for the pensions scheme were announced was say] “OK, can we stop it. Is there a legal challenge?” And so as you would expect, all aspects of the legal position were looked at in great detail. The main point to be considered is – Police Pensions Act 1976 – the Judicial Review around human rights, age discrimination – all these aspects have been considered.

If we start with section 2 of the Police Pensions Act, it says you cannot worsen the pensions of existing police officers – you cannot make their pension arrangements worse without their consent. On the face of it that is very good news if you’re trying to stop pension reform. But there is parliamentary sovereignty. And that means we live in constitutional arrangements where any government can change the law and no government can pass an act that bans its successors. What this government said was they would make whatever legislative changes were required in order to give effect to changes to public service pensions, which in a police context meant doing something around S2.

And what they did was pass the Public Service Pensions Act 2013. And that took S2 of PPA and moved it aside. They didn’t repeal S2, they just said that as of 1 April 2015, the only pensions you can lawfully pay are payable under the PSPA 2013 – subject to transitional arrangements. And in doing that S2 is effectively sidestepped which is why no challenge can be brought under S2.

So what was then explored were different concepts. One of which was legitimate expectation – which boils down to “but that’s not fair”, when it plainly isn’t fair. The starting point when considering the legitimate expectation argument is accrued rights as we’ve seen are very well protected in these arrangements. So the starting point is to prove that there is a legitimate expectation of no future changes. And that is pretty difficult to do. And even if you can prove it, the thing about legitimate expectation is that it can be overridden in the public interest. And guess what – it is the government’s judgement as to what the public interest is. This is one of the reasons why I started talking about [Lord] Hutton [a Labour peer who looked into pension reform in the public sector]. This isn’t the police service being singled out and given treatment that nobody else is getting. What is happening is a concerted decision by all three major parties that public service pensions across the board need to change. And that is the kind of decision that the courts accept is a matter for government and not for courts.

So what about human rights? Obviously the bottom line is that this is very similar to legitimate expectation. You try and argue that there is interference with property rights based on the European Convention – that is the most likely right. But again the rights are protected so you cant say that anything that has been accrued has been taken away. So even if you can establish interference with a property right, which is a property right into a pension that hasn’t yet accrued, is quite difficult again it can be justified in a public interest. And again it leads us to the same place – the government’s judgement as to the public interest.

So then what about age discrimination? It is certainly the case on pensions reform that there are different impacts on different ages. Those people aged 45 or over on 1 April 2012 are fully protected and treated more favorably on age grounds than those who are not. But the issue with age discrimination, unlike other forms of discrimination – it can be justified. It is not automatically unlawful. And given the reforms across public service pensions generally, the idea of giving special protection to those that are nearing retirement is plainly going to be justified. But even more important than that is even if a complaint is brought in relation to age discrimination and is succeeded it wouldn’t have stopped pension reform. All it would have stopped would have been full protection to those who are fully protected, and tapering protection for those that are tapered. So actually, it would have been more likely to make matters worse.

There was also miss-selling – the idea that any one of you who were joining the scheme would be able to say, “well, actually this isn’t what I was told or promised when I was joined.” The first point there “is there a contract with the force according to the rules when I joined.” And the answer there is that you can’t have a contract to provide a police pension outside legislation which at the time you joined was the PPA 1976. And is now the PSP Act. So any claim would have to be legislative misstatement or negligent misrepresentation. And these claims are very tricky. You have to get over a series of hurdles, that get higher as you go on. The first hurdle is that there needs to be a relevant duty of care – and it is harder than you might think to establish that duty. Let’s assume that you can. What you then have to show is that there is a negligently wrong statement, and that at the time it was made it was wrong. To look at what people were told when they joined, most people will tell you this is what the police pension is. They may have been told that it is underwritten by an act of parliament. And that’s true. Let’s assume that we get over this hurdle and we show that in fact not only was there a duty of care and there was a negligently wrong statement – it is at this point that the hurdles get very high indeed.

Because then what we have to show is detrimental reliance on that statement. In other words you have to show that someone might have come along and said, this is the true position in relation to police pensions. The true position in relation to police pensions would have been – at the moment the police pensions regulations provide that you work 30 years and you get a pension that’s two thirds of your final salary. These are the retirement arrangements and these are various other provisions in relation to it. This pension is made under S2 of the PPA 1976 and it says that your pensions arrangements cannot be changed to your detriment without your consent. But you have to remember that we live in a world of parliamentary sovereignty so in theory some government in the future could come along and decide that they are going to amend or sidestep the PPA. What you would have to convince a court would be that if someone had said to you when you joined, is that you would have said, OK in that case I don’t want a pension worth 24% of my salary. That is a pretty big ask. But even if you get over that, you then have to show that you would be better off if you had not joined the pension scheme. The problem is with that is that the notional value of the pension scheme has a value of 24% of your salary, and even with contributions of 15% the rate of return between 15% and 24% year on year is such that demonstrating financial loss is frankly impossible. So for that reason, mis-selling claims are not going to succeed.

So having explored in great detail – can we stop pension reform happening – it was then a matter of making the best of a bad lot. So what are the priorities? Three priorities were identified. There was a great concern about the level of contributions at 13.7% – it is a very high level of contribution. The second and frankly biggest concern was this idea of not serving until the age of 60 – not having to serve until the age of 60. That was regarded as a terrifying prospect really – the idea that people can serve until 57, 56, 58 and then have to wait ten years for their pension. And the third priority was to get as many people into transitional arrangements as possible and the best possible transitional protection as possible. There were active discussions with the Home Office after they published their proposals in March 2012 – those discussions are available and details will be on the Police Federation website. There are detailed correspondences about the representations put forward by the Police Federation against all aspects of pension reform.

What came out of all that – bearing in mind pensions are not subject to arbitration? Ultimately there is no option of appearing to the Police Arbitration Tribunal on pensions – it’s the Home Secretary’s decision. The decision she reached in September 2012 in relation to the priorities which given – no movement in contributions, 13.7% is what you’re getting and that is that. The transition arrangements were improved and protection was improved. But importantly an ability to leave from 55 was secured with immediate pension and the actuary reduced. And so that sense of the danger of getting state pension if you leave at 57, 58 or 59 was taken away.

This isn’t a popular statement but it is a correct statement: The new scheme is still a very good pension scheme indeed. It is not as good as the 87 scheme. And it is not as good as the 2006 scheme. But do you want to stay in the old scheme is not a choice available. The choice that is available to you is do you want this pension, or do you want to be out on your own arrangements. And seen in the context of pension schemes generally, this is still a very good pensions scheme. It has guaranteed benefits – there is no investment risk. It has an employment contribution worth 14.3% – in other words more than you are putting in and which you would lose completely if you opted out and it includes the ability to take your pension from your old scheme to your new scheme from 55. Now that is actuarily reduced from 60 – what you have to remember is at the time you get to 55, most public service pensions will be payable until the age of 67 or 68.