As part of its public sector pension reforms in 2012, the coalition government exempted employees who were within ten years of their pension age from any changes to their benefits.
Younger judges and firefighters, who did not enjoy this protection, challenged this difference in treatment on age discrimination grounds.
The Court of Appeal found that the government failed to show that the age discrimination furthered a legitimate aim and was therefore unjustifiable.
The government is seeking leave to appeal the judgment but, if this is unsuccessful, the Chief Secretary to the Treasury admitted that “the Court will require steps to be taken to compensate employees who were transferred to the new schemes”.
In a statement to the House of Commons on 30 January, the Chief Secretary estimated that “the potential impact of the judgment could cost the equivalent of around £4 billion per annum”.
This estimate is significant because it implies that the government sees the ruling potentially impacting members of all the main public sector pension schemes and not just younger judges and firefighters.
The statement also suggests that the government will try to pass the costs of complying with the judgment on to public sector pension scheme members themselves.
Prospect deputy general secretary Garry Graham said “Prospect members voted in favour of the reforms to their public sector pension schemes so we were not party to any legal challenge to changes our members agreed to.
“In the short-term it is unclear precisely how the judgment might be applied because many younger Prospect members actually benefited from moving to the reformed schemes rather than staying in the legacy final salary schemes.
“In the long-term there could be significant challenges arising from the judgment if the government seeks to pass its costs on to members and perhaps revisit important aspects of previous agreements.”
One immediate consequence of the legal uncertainty was the further announcement by the Chief Secretary that the implementation of the cost cap mechanism for public sector pension schemes is being paused.
The cost cap mechanism is an important part of the agreed reforms to public sector pensions under the Coalition government. It manages unexpected risks through an agreement to keep taxpayer costs at 2 percentage points above or below a baseline level.
As a result of public sector pay restraint and lower than expected mortality improvements, the cost of the main public sector pension schemes has actually fallen significantly since the baseline for the cost cap mechanism was established.
By counteracting these factors and returning the cost to the agreed baseline level, the cost cap mechanism was expected to result in improvements in the value of the civil service pension scheme of about 20% from April 2019.
Prospect has been pushing for the improvements to the civil service pension scheme to be a combination of reductions to member contributions, increases in the rate pension is built up and an increase in the death-in-service lump sum.
Graham said: “The decision to delay the implementation of the cost cap mechanism is a huge blow to Prospect members across the public sector.
“Prospect officials had been working hard to deliver possible reductions in member contributions that could have helped alleviate cost of living pressures caused by years of public sector pay restraint.
“Suspending the implementation of the cost cap mechanism calls into question the government’s commitment to the pension agreements it made with Prospect members and millions of other public sector workers.”
The legal uncertainty has also resulted in further delays in the reform of smaller public sector pension schemes such as the Research Councils Pension Scheme and the UKAEA’s Combined Pension Scheme. These schemes will not now be reformed before April 2020.
The judges and firefighters cases do not directly impact private sector employers where defined benefit schemes have been closed and replaced by defined contribution schemes (with older members generally in the former and younger members generally in the latter) because this situation is specifically exempted from age discrimination legislation.