National Audit Office report on Police and Firefighters’ Pension Scheme commutation factors

The National Audit Office (NAO) has today published its findings from its investigation into the compensation paid by government to those that retired from the Police and Firefighters' Pension Schemes between 2001 and 2006 without receiving their full pension entitlement. These payments were made following the Pensions Ombudsman's finding of maladministration in the Government Actuary's Department's (GAD) handling of the administration of the factors that were used to convert annual pension entitlements to lump sum payments. The NAO carried out this investigation due to the significant amount of money involved and the length of time it has taken to resolve. It found that the government failed to understand its obligations for the oversight of key factors that translated annual pension payments to lump sums, resulting in payments totalling £711m covering 34,000 pensioners. Due to the extent of the legal process in the case, some police and firefighters were retired for over 15 years before they received their full pension entitlement from government.

The key findings of this investigation are as follows:

• ·        The government failed to provide appropriately valued pension lump sums for an estimated 34,000 police and firefighters in the 2001 to 2006 period. The government was aware in 2006 that the commutation[1] factors used to calculate police and firefighters’ pension lump sums did not reflect the life expectancy of pensioners or the underlying trends across pension schemes.
• ·        The Pensions Ombudsman (the Ombudsman) upheld the pensioners' complaints in 2015, but some individuals had retired for over 15 years before receiving their full pension entitlement.  
• ·        The total value of payments to the affected individuals is estimated to be £711m, an average of £21,000 per pensioner. This equates to increases of between 5 and 36 per cent of the lump sums the pensioners received initially.
• ·        The government did not understand its responsibilities for the management of the factors that converted annual pension payments to lump sums in the 2001-2006 period.
• ·        The initial query about the appropriateness of the 2001 to 2006 commutation[2] factors was raised by the Office of the Deputy Prime Minister now known as DCLG, in 2002.
• ·        Following internal consideration of the factors and the concerns raised by pensioners, GAD updated the commutation factors for the Police and Firefighters' Pension Schemes in December 2006. At this point the government was aware that the factors had not changed between the time they were last updated in 1998 and 2006 and had increased during the period.
• ·        The government decided to test its liability through the courts. In 2009, the High Court was asked to judge whether the Home Office was able to delay the implementation of the revised factors, produced by GAD in 2006, to the Police Pension Scheme until October 2007. The High Court ruled that the Home Office did not have the discretion to delay implementation. In effect this meant that the factors were purely a matter for GAD's professional judgement. The High Court judgement also ruled that GAD had a statutory responsibility to ensure the factors were kept up to date.
• ·        The Ombudsman invited challenges to its jurisdiction to rule on the government’s actions in relation to this case in March 2010, which GAD took up. The Ombudsman concluded that he did have jurisdiction over this case in July 2011.
• ·        Following the Ombudsman's conclusion, and supported by legal advice, GAD escalated its challenge to the Ombudsman's ability to rule on the case through the High Court and the Court of Appeal from September 2011 through July 2013. This legal process restricted the Ombudsman's ability to progress his judgement on the test case. The High Court and the Court of Appeal agreed with the Ombudsman's conclusion with regard to jurisdiction. This process took 20 months to complete. 
• ·        GAD's legal challenge to the Ombudsman's jurisdiction was not directly related to the initial failure to update the commutation factors. This legal process did not seek judgement on whether an initial mistake had been made. The case focused on the Ombudsman's ability to exercise judgement on GAD's actions in relation to the commutation factors in the pre-2006 period. It is not clear whether the government would have been able to avoid the liability, if the legal challenge to the Ombudsman's jurisdiction was successful.
• ·        The Ombudsman upheld the test case brought by Mr Milne (the test case) in May 2015. He concluded that there was maladministration as GAD should have proactively updated the commutation factors rather than waiting to be commissioned. The Ombudsman ruled that GAD had a professional duty to take the lead in the consideration of the assumptions that fed into the commutation factors as it had the expertise to do so. This resulted in the recognition of the £711m liability by government in May 2015.
• ·        During the period this issue arose, there was a lack of independent oversight of the schemes by parties outside government or representation from scheme members. This was addressed in April 2015 through the introduction of pension boards with independent oversight and representation from pension scheme members.
• ·        GAD has reviewed its funding mechanisms and internal controls to ensure its statutory duties, such as the review of commutation factors, are clearly understood and discharged. GAD's revised controls, together with the updated approach to governance of government pension schemes, are designed to provide a more rigorous approach to ensuring that scheme regulations are considered sufficiently in future cases of this nature.

Notes for Editors

1. 1.      This is the process by which an individual sacrifices a portion of their future pension payments, in exchange for an 'actuarially equivalent' lump sum.