Policy paper

Judicial Pension Scheme 2022 and the Cost Control Mechanism

Published 8 June 2023

This policy statement explains how the cost control mechanism (CCM) will operate in relation to the reformed Judicial Pension Scheme 2022 (JPS 2022), including details regarding the liabilities that will be considered by the CCM and how the employer cost cap will be set.

1. Background

The CCM is designed to ensure a fair balance of risk with regard to the cost of providing public service defined benefit pension schemes between members of those schemes and the Exchequer (and, by extension, taxpayers). If, when the CCM is tested, those costs have increased or decreased by more than a specified percentage of pensionable pay compared to the employer cost cap (which can be thought of as a target cost), member benefits (and/or member contributions) in the relevant scheme are adjusted to bring costs back to target.

Following a review by the Government Actuary^{[footnote 1]}, and a full and public consultation process^{[footnote 2]}, the Government confirmed in October 2021 that it would implement three reforms to the CCM in time for the 2020 valuations. The reforms will make the CCM more stable, meaning members can have greater certainty about their benefits and level of contributions. They are:

1. reformed scheme only design
2. wider 3% cost corridor
3. economic check

On 1 April 2022, the Judicial Pension Scheme 2022 (JPS 2022) was established through The Judicial Pension Regulations 2022 (as made under the PSPA 2013). This replaced the New Judicial Pension Scheme 2015 (JPS 2015). All active Judges were enrolled in JPS 2022 at this date, and all previous judicial pension schemes closed for future accrual. JPS 2022 is a tax-unregistered scheme, so annual allowance limits or lifetime allowance limits don’t apply. This returns judges to the position that they were in before 2015, as the pre-2015 pension schemes were also tax unregistered. It also has a higher benefit accrual rate than JPS 2015, and a uniform contribution rate. JPS 2022 is a Career Average Revalued Earnings (CARE) scheme, rather than a final salary scheme, and the normal retirement age is linked to the state pension age, similar to other public sector arrangements.

A major review by the Senior Salaries Review Body (SSRB) in 2018 found that moving judges to a tax registered scheme, JPS 2015, significantly impacted the recruitment and retention of judges, risking the effective functioning and reputation of the justice system. The value of pensions for the judiciary is of particular significance; they are in a unique situation and follow a distinctive career path. They usually take up judicial office at a later stage in life after long careers in the private sector, and many will take a pay cut when they join, and likely have substantial existing tax registered pensions.

On 1 April 2022, JPS 2015 was replaced by JPS 2022 to address problems with the recruitment and retention of judges. In 2020 the Government ran a consultation on the design of the scheme, and in 2021 a consultation on the regulations underpinning it.

The 2020 valuation will be JPS 2022’s first valuation, meaning the CCM will not be tested. Instead, an ‘employer cost cap’ for the scheme will be set through regulations amending the Judicial Pension Regulations 2022, against which the cost of the scheme will be tested at subsequent valuations.

2. Setting the employer cost cap

The CCM works by comparing a current assessment of costs against the employer cost cap set at a scheme’s first valuation. This process involves analysis of scheme data and setting assumptions about the future, both when setting the employer cost cap at the first valuation and assessing changes in costs at subsequent valuations.

For most reformed schemes (including JPS 2015), employer cost caps were set at the 2012 valuations using both the latest long-term economic forecasts (e.g. expected long-term GDP growth) and other demographic assumptions (e.g. life expectancy) at the time. Those employer cost caps reflect what we expected the schemes to cost (under the CCM methodology) when they were introduced.

Originally, the CCM did not consider changes in scheme costs caused by changes in long-term economic assumptions. However, the Public Service Pensions and Judicial Offices Act 2022 sets the framework for an economic check. The check is designed to ensure greater consistency between changes in benefits and changes in the wider economic outlook. The way the reformed CCM operates with the economic check is as follows:

1. Initial result: as before, costs are assessed excluding the impact of any changes to the long-term economic variables to see if a breach has occurred.
2. Economic check: if a breach has occurred, the calculation is repeated with changes to expected long-term GDP growth and long-term earnings growth considered.
3. Final result: a breach will only be implemented if it still occurs in the same direction following the second calculation, with the smaller of the two breaches being implemented.

Given the differences in scheme design between the JPS 2015 and JPS 2022, a new employer cost cap needs to be set for JPS 2022 to reflect, for example, its higher accrual rate and tax status.

The employer cost cap will be calculated at the valuation with effective date of 31 March 2020 and so it will use the scheme data as at that date.

The assumptions used to set the employer cost cap for JPS 2022 will be those that were in force at the 2012 valuation and which were also used to set the JPS 2015 employer cost cap. This includes demographic assumptions, like expected mortality improvement, as well as assumptions about the wider economic outlook (long term GDP growth). When the CCM is subsequently tested at future valuations, the assessment of cost will be calculated using assumptions in force at the time of that future valuation, and then will be compared against the employer cost cap, as normal. This will ensure the CCM will operate for JPS 2022 in a largely consistent manner with other public service pension schemes. In practice, this means:

• Any cost pressures emerging at future valuations will be relative to the 2012 valuation assumptions.

• The economic check will apply for JPS 2022 as it does in all other schemes, as the same figure for expected long-term GDP growth will be used to set the employer cost cap for JPS2022. The economic check is designed to ensure changes to member benefits and/or contributions are broadly consistent with the wider economic outlook. It is appropriate that all schemes are subject to the same economic check because it would be inappropriate if changes in one scheme could be considered consistent with the economic outlook while the same changes in another scheme were not.

How the CCM applies to JPS 2022 will therefore be largely consistent with how it applies to the other reformed public service pension schemes. At subsequent valuations, the CCM will continue to measure how current costs compare to what was envisaged when the reformed, CARE schemes were first introduced, with adjustments made to JPS 2022 employer cost cap to reflect the fact its design has been enhanced.

HM Treasury has set out in Directions the technical detail of how the employer cost cap should be set for JPS 2022 at the 2020 valuations.

3. Liabilities to be included in the CCM for JPS 2022

As set out in the Government’s response to the consultation on proposals to reform the CCM, the reformed scheme only design means that from the 2020 valuations onwards, the CCM will only consider past and future service in the reformed schemes, with legacy scheme costs excluded. This will lead to a more stable CCM and ensure consistency between the set of benefits being assessed and the set of benefits potentially being adjusted.

For the unfunded schemes, reformed CARE schemes were introduced on 1 April 2015. This included JPS 2015. Moving to a reformed scheme only CCM means that all service in the legacy schemes will be excluded from the CCM. This includes all accrued service on or before 31 March 2015, as this service is exclusively in the legacy schemes. For the judiciary, this means the schemes like the Judicial Pensions and Retirement Act (JUPRA) 1993, or its fee-paid equivalent, the Fee-Paid Judicial Pension Scheme (FPJPS) 2017, are excluded from the CCM.

When the reformed schemes were introduced, the Government agreed, following discussions with trade unions, to allow active members of the legacy schemes who were close to retirement (as at 31 March 2012) transitional protection (meaning, for example, that those who would reach normal retirement age on/before 1 April 2022 were entitled to continue as members of their legacy schemes, rather than start to accrue pension benefits in the new reformed schemes). In December 2018, the ‘McCloud judgment’ of the Court of Appeal upheld this to be unlawfully discriminatory. The Public Service Pensions and Judicial Offices Act 2022 implements measures which will remedy this discrimination. For the period 1 April 2015 – 31 March 2022, eligible members (those who joined the scheme on or before 31 March 2012 and still active on 1 April 2015) of the unfunded schemes will be offered a choice between legacy and reformed scheme benefits. From 1 April 2022, all active members of the judicial pension scheme will be members of JPS 2022 only.

Thus, all judicial pension scheme service from 1 April 2022 onwards will be included in the CCM as it will be exclusively in JPS 2022, which replaced JPS 2015 on the same date.

The retrospective McCloud remedy will operate over the period 1 April 2015 – 31 March 2022. For this period, the reformed scheme only design will operate as follows:

• For members not in scope of remedy, all service over this period is in JPS 2015. This service will be included in the reformed scheme only CCM, because JPS 2015 is a reformed, CARE scheme. Any changes in cost relating to past service in JPS 2015 of those not in scope of the remedy will be captured by the CCM.
• Members in scope of the remedy will be able to choose between legacy scheme or JPS 2015 benefits for this period. Service for members in scope of the remedy over this period will be excluded from the CCM. This is consistent with the other unfunded public service pension schemes, where the remedy to the discrimination involves offering a choice of benefits to eligible members.

Going forward, for the purposes of the CCM, the costs of service in JPS 2015 that are included in the reformed scheme only CCM will be considered together with service costs in JPS 2022, rather than being considered separately.

Further information regarding the implementation of the reformed scheme only design can be found in the policy statement that has been published by HM Treasury.

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1. https://www.gov.uk/government/publications/cost-control-mechanism-government-actuarys-review-final-report ↩

2. https://www.gov.uk/government/consultations/public-service-pensions-cost-control-mechanism-consultation ↩