Ombudsman s Determination Applicant Scheme Respondents Mr R Police Pension Scheme (PPS) Government Actuary's Department (GAD) Outcome 1. I do not uphold Mr R s complaint and no further action is required by GAD. 2. My reasons for reaching this decision are explained in more detail below. Complaint summary 3. Mr R has complained that:- GAD announced a change to the PPS commutation factors on 20 April 2011. The factors were not backdated; unlike under the previous review in 2008. There was an agreed protocol for GAD to notify the Police Negotiating Board 1 (PNB) of its intention to commence a review, which it failed to observe. Previously, GAD backdated the implementation date of commutation factors when it had failed to notify the PNB. When he retired, he was unaware that GAD were about to review the factors. If it had notified the PNB, he would have delayed his retirement. Background information, including submissions from the parties Background 4. Mr R retired on 3 January 2011. He has calculated that, had the revised 2011 commutation factors been used in his case, his lump sum would have been in the region of 20,000 higher. He equates this to a loss of monthly pension in the region of 200 per month. 5. As at the date of Mr R s retirement, regulation B7(7) provided: 1 The PNB was abolished by the Anti-social Behaviour, Crime and Policing Act 2014 1
Where the person retires or has retired and a notice of commutation given by him becomes or has become effective, the police authority shall reduce the pension to which the notice relates in accordance with the notice as from the time from which the notice is effective and shall pay him a lump sum of such amount as is the actuarial equivalent of the surrendered portion of the pension at the date of his retirement, calculated from tables prepared by the Scheme actuary 6. GAD says it began its review on 25 March 2011. It has explained it was prompted to initiate the review by a change in the discount rate used to determine employers contributions announced in the Budget on 23 March 2011. The commutation tables were ready for publication on 20 April 2011. GAD has confirmed that it only consulted the Government department responsible for the management of the PPS; in England and Wales, this was the Home Office. Mr R s position 7. Mr R accepts that the PPS regulations do not require GAD to consult the PNB but he asserts that GAD had agreed to do so. He refers to The Queen on the Application of the Police Federation of England and others v The Secretary for the Home Department, The Government Actuary s Department [2009] EWHC 488 (Admin). Mr R points out that the judge referred to a 1983 agreement by GAD to invite comments when it had decided the commutation tables should be reviewed. 8. Mr R says he has seen no evidence that GAD s responsibility to notify its intention to review the PPS commutation factors was cancelled by any judgment handed down by the courts. 9. Mr R is of the view that the intention to review the PPS factors pre-dates the March 2011 Budget. He has referred to:- Annex B, Pay-As-You-Go Public Service Pension Schemes December 2009 Cashflow Projections Methodology, data and assumptions, 6 April 2010. In particular, Mr R refers to the statement: Other assumptions Changes will be made to the schemes following the actuarial valuations of the scheme. However, for presentational purposes, these projections ignore the actual timings of actuarial valuations and assume the scheme changes are made continuously, starting from April 2011. In practice savings would start to emerge when each scheme implemented the first changes as a result of cap and share. The Independent Public Service Pensions Commission (IPSPC) Interim Report, 7 October 2010. 2
HM Treasury Consultation on the discount rate used to set unfunded public sector pension contributions, December 2010. In particular, Mr R refers to statements to the effect that, should the SCAPE 2 discount rate change, the Government intended to take actuarial advice as to the continued use of this discount rate. Police Pension Scheme Standard Note 700, July 2011 (PPS SN700). In particular, Mr R referred to statements relating to the backdating of the 2008 commutation factors. 10. Mr R suggests that the driver for the review of police pensions was the IPSPC report of 7 October 2010. He argues that this led to the HM Treasury Consultation in December 2010. Mr R is of the view that the review of commutation factors was delayed pending the outcome of the discount rate review. He argues that GAD were aware of the review of the discount rate before the 2011 Budget speech. 11. Mr R contends that intention to review the commutation factors was formed at the latest by the start of December 2010, or more reasonably by 7 October 2010. He argues that, in either case, GAD should have informed the PNB. He is of the view that the reasons given for backdating the 2008 factors should apply equally to the 2011 factors; in particular:- No advance warning of the changes was given; The same factors causing delay were present; and The review was delayed pending the outcome of the HM Treasury consultation. 12. Mr R points out that, in 2008, GAD advised that, to allow time for implementation of the review, the commutation factors should be backdated by seven months and three weeks. GAD s position 13. GAD s position, taken from its response to Mr R s complaint to it and its correspondence with TPO, is summarised as follows:- Under the PPS regulations, GAD, in its capacity as Scheme Actuary, prepares tables of commutation factors which are the actuarial equivalent of the commuted portion of the pension. Following a change to the discount rate used to value public service pension schemes, announced in the 2011 Budget on 23 March 2011, GAD reviewed the PPS commutation factors. It completed the review on 20 April 2011 and 2 Superannuation Contributions Adjusted for Past Experience 3
sent the revised factors to the Home Office for dissemination. The factors were effective from that date. The Police Federation case provided greater clarity as to the responsibility for the commutation factors. GAD is responsible for deciding when to review the factors and carrying out the review. The judge found that the judgment on whether to revise the factors calls for an entirely actuarial expertise and is to be exercised only by the Government Actuary 3. The PPS regulations do not require the Scheme Actuary to consult any other party when preparing the new factors. It was for this reason that it did not consult the PNB when reviewing the 2011 factors. It has since notified the PNB that it does not intend to consult unless there is specific information it wishes to obtain. It has been advised that it has no duty to inform members when reviewing the commutation factors. The 1983 undertaking was to allow consultation on the methodology and assumptions to be used in the construction of the commutation factors. Following clarification of its responsibility to determine the factors in the Police Federation case, it decided consultation was not needed and would lead to unnecessary delay. In the Police Federation case, the judge said, In my judgment the tables come into effect on the date when they are prepared. As a result, the 2006 factors were backdated. The same principle has been used to determine the implementation date following the 2011 review. Adjudicator s Opinion 14. Mr R s complaint was considered by one of our Adjudicators who concluded that no further action was required by GAD. The Adjudicator s findings are summarised briefly below:- Mr R sought to argue that the commutation factors published in April 2011 should be backdated. It was not clear which date to which Mr R considered the factors should be backdated but the Adjudicator took him to mean that it would be at least January 2011; that is, when he retired. The commutation factors had previously been reviewed in 2006. Those factors were the subject of the Police Federation case. Updated tables had been produced by GAD on 1 December 2006 but were not introduced by the then Home Secretary until 13 May 2008, backdated to 1 October 2007. The Police 3 The PPS regulations were amended with effect from April 2010 and now refer to the Scheme Actuary. 4
Federation of England and two PPS members sought to challenge the date of application of the new factors 4. The judge said: No tables appear in the Regulations themselves, and it is common ground that the preparation of tables is a task to be undertaken by the Government Actuary 5, having regard to changing conditions relevant to the exercise of an actuarial judgment. The lump sum to be paid, at any given time, must be the actuarial equivalent of the surrendered portion of an officer s pension Whilst it is correct that there is an express obligation only on police authorities to use the tables, the Regulation clearly contemplates that there is a duty to prepare tables Since the actuarial equivalent is liable to change over time, a judgment must be exercised periodically as to whether to revise the existing tables, to ensure that the tables to be used in calculating the actuarial equivalent do in fact enable equivalence to be achieved That judgment calls for an entirely actuarial expertise and is to be exercised only by the Government Actuary Having found that regulation B7(7) imposed a duty on the Government Actuary to prepare the commutation tables, the judge went on to consider the submission that there was a distinction to be drawn between preparing the tables and issuing them. She said: I see no meaningful distinction between preparing and issuing new tables for the purposes of Regulation B7(7), the plain words of which confer upon the Government Actuary, the only person named in the Regulation, an obligation to prepare tables for use, so that the commuted sum may be correctly calculated. In my judgment, absent any provision to the contrary, once the Government Actuary had prepared the tables for use in December 2006, the statutory obligation under Regulation B7(7) had been discharged and the tables took effect from that date. On that basis, the commutation tables prepared by GAD on 20 April 2011 could only take effect from that date. The Adjudicator noted Mr R s arguments concerning the tables issued in 2008. However, the implementation of these tables was only backdated because they had been unlawfully delayed in the first place. The same could not be said for the 2011 tables. 4 A full report of the case can be read at: http://www.bailii.org/cgibin/format.cgi?doc=/ew/cases/ewhc/admin/2009/488.html&query=(title:(+police+))+and+(title:(+federation +)) 5 Now the Scheme Actuary 5
The Adjudicator agreed with Mr R that the evidence suggested that the possibility of reviewing the existing commutation tables was likely to have been within GAD s contemplation prior to 23 March 2011. For example, it had clearly contributed to the IPSPC s review because there were references in the interim report to it having provided projections. It would also have been aware of the HM Treasury consultation on the discount rate used in unfunded public service pension schemes. The IPSPC interim report, dated 7 October 2010, said: The discount rate used to set employer and employee contributions is critical in order to ensure that the costs of the future pension promises are being adequately allowed for in workforce planning and budgeting and that contributions required can be appropriately divided between the employer and the employee. The Commission believes there is a case for reviewing the current discount rate of RPI plus 3.5 per cent, which is clearly at the high end of the spectrum and recommends that the Government undertakes a review to establish the appropriate rate, preferably in time to inform the Commission s final report. However, the decision to review or revise the tables and when to do so was a judgment requiring actuarial expertise. It was a task to be undertaken by GAD having regard to changing conditions relevant to the exercise of an actuarial judgment. GAD had said that the review of the commutation tables was prompted by a change to the discount rate announced on 23 March 2011. This was clearly a matter of actuarial judgment and, in the Adjudicator s view, outwith the Ombudsman s jurisdiction. It might be argued that the time taken to prepare the tables, once the decision to revise the factors has been taken, should be seen as an administrative matter. A distinction would have to be drawn between the decision that the change to the discount rate was a factor requiring the tables to be revised and the process by which the tables were then prepared. It might be argued that undue delay in preparing the tables could amount to maladministration. However, in the Adjudicator s view, this approach ran into difficulty because it would require an analysis of what was, essentially, an actuarial function. This was not something which the Ombudsman would be able to undertake. In the Adjudicator s view, Mr R s case for backdating the commutation tables could not succeed either on jurisdictional grounds or on merit. Mr R also argued that GAD was required to consult the PNB. He had referred to evidence considered in the Police Federation case. In that case, the judge agreed with a submission that GAD seemed to have accepted that the PNB was to be consulted. She had referred to correspondence between the PNB and GAD, in 1983, in which GAD had confirmed it would invite comments when it considered that the commutation tables should be reviewed. A 1983 6
note from the Home Office had stated GAD had undertaken to give notice of any intention to revise the commutation tables for the PPS. Members of the Joint Pensions Committee were to be invited to comment before new tables were constructed, on the understanding that the principles upon which they were based were a matter for GAD. The commutation factors were reviewed again in 1998. The revised tables were sent to police authorities via a Home Office circular, which had referred to the PNB having been notified of the intended changes and given time to comment. The judge had drawn a distinction between the power to make regulations relating to the PPS, under the Police Pensions Act 1976, and the operation of the regulations themselves. The power to make regulations, which was exercisable by the Home Secretary, was subject to statutory consultation. There was no equivalent statutory requirement for GAD to consult before it prepared revised commutation tables for the purposes of regulation B7(7). However, clearly GAD had been prepared to allow for consultation with the PNB in respect of decisions to review the commutation tables prior to 2011. It had said its approach changed because of the Police Federation case, which it considered to have clarified its responsibility under regulation B7(7). In a letter to the PNB, dated 16 January 2012, GAD had referred to the Police Federation case and had said it was responsible for deciding when to review the factors and for carrying out the review. It had gone on to say it would carry out a review as and when new information became available which it considered relevant. GAD had said such a review would not necessarily lead to a revision of the factors. It had said the regulations did not require it to consult any other party when preparing new factors but also did not preclude consultation. It had explained it would not expect to consult where it was in possession of sufficient information to exercise the actuarial judgment required of it by regulation B7(7). GAD had said this was the approach it had followed in 2011. GAD s approach to consultation had clearly changed with the 2011 review. Whilst its approach, in 2011, was contrary to an undertaking it had previously given, it had explained why the approach changed. In the absence of a statutory requirement for GAD to consult the PNB before preparing revised tables, it was doubtful that the departure from its previous undertaking could be said to amount to maladministration. Particularly since GAD had been able to put forward a cogent reason for its decision to change the approach. Mr R argued that he would have postponed his retirement if he had been aware that GAD were reviewing the commutation tables. In the Adjudicator s view, even under the previous undertaking, GAD would only have initiated consultation following the 2011 Budget announcement. It was at this point that it could form the view that the change in the discount rate 7
was a factor which necessitated reviewing the commutation tables. Prior to this date, GAD may well have been aware that a change to the discount rate was possible or even likely. However, the Adjudicator did not consider it reasonable to expect GAD to have taken any action before the change to the discount rate had been announced. Mr R retired on 3 January 2011. The Adjudicator thought it would not be unreasonable to suggest that he would have made his decision to retire at some time in December 2010, at the latest. This was well before the change to the discount rate was announced. 15. Mr R did not accept the Adjudicator s Opinion and the complaint was passed to me to consider. Mr R provided his further comments which do not change the outcome. I agree with the Adjudicator s Opinion and I will therefore only respond to the key points made by Mr R for completeness. Ombudsman s decision 16. The key factor in GAD s decision to revise the 2011 commutation factors for the PPS appears to have been the change in the relevant discount rate. That change was announced in March 2011. Until the change was made official by the Budget announcement, I do not find that GAD could have been expected to take any action. The fact that it was, more than likely, aware of the probability that such a change would be announced may well have contributed to the relatively short time taken to prepare the new tables. I make no further comment on this because, as has been explained, the time taken to prepare actuarial tables requires an analysis of an actuarial function, which is not within my remit. 17. Mr R relies, primarily, on GAD s previous willingness to notify the PNB of its intention to review the commutation factors. He points out that GAD s previous undertaking to notify the PNB has not been cancelled by the courts. I do not find that the nature of GAD s undertaking to notify the PNB would require court action to bring it to an end. It was a voluntary undertaking on GAD s part. I note also that there was no statutory requirement for GAD to consult or notify any other party when it was considering reviewing the PPS commutation factors. 18. GAD has said that the Police Federation case clarified its responsibility for the PPS commutation factors. That case made it clear that it is GAD which is responsible for exercising periodical judgment to review the commutation factors. It has explained that it would not now expect to consult where it is in possession of sufficient information to exercise that judgment. It does, however, accept that the regulations do not preclude consultation. 19. My role is to consider whether GAD s decision not to notify the PNB prior to reviewing the PPS commutation factors amounts to maladministration. Given that this was an entirely voluntary agreement and GAD s role had been clarified by the courts, I do not 8
consider that there are grounds for finding that its change in approach amounts to maladministration. 20. Having come to that conclusion, I do not need to consider Mr R s claim that he would have postponed his retirement in detail. I would, however, say that it is more than likely that he had made his decision to retire some time before GAD might have been expected to notify the PNB under the old arrangement. Its change in practice made no difference to the position he finds himself in. 21. Therefore, I do not uphold Mr R s complaint. Anthony Arter Pensions Ombudsman 13 February 2018 9