Public service pensions: government consults on McCloud remedy proposals and ends pause on costs cap
Published on 29th Jul 2020
Proposals would give members the choice of whether to accrue benefits under legacy or reformed schemes in respect of service between 2015 and 2022, alongside other reforms, including to the Local Government Pension Scheme 'statutory underpin'.
In 2018, the Court of Appeal ruled that arrangements put in place in 2015 to protect members of the Firefighters' and Judicial pension schemes who were close to retirement from pensions changes were discriminatory on grounds of age. Because members close to retirement in other public service pension schemes had been given similar protections, the government committed to review the position of the younger (unprotected) members of all public service pension schemes. It has now published its proposals for ensuring that younger members are no worse off.
What was the McCloud case about?
On 1 April 2015, following recommendations in Lord Hutton's Independent Public Service Pensions Commission in 2011, the government implemented changes transforming public service workers' pensions from final salary schemes ("legacy schemes") to career average revalued earnings (CARE) schemes ("reformed schemes"). Local government workers' pensions were moved to CARE a year earlier.
After discussions with trade unions, the government agreed to introduce "transitional protections" for public sector workers within 10 years of retirement allowing continued membership of the legacy schemes (or, in the case of the Local Government Pension Scheme, a final salary underpin). Some members who were more than 10 years away from retirement had "tapered protection" allowing continued membership ranging from a few months to several years.
In December 2018, in the McCloud case, the Court of Appeal found the transitional protections to be unlawful on age discrimination grounds, as younger members would potentially be worse off than members who were closer to retirement. Although the litigation related to the Firefighters' and Judicial pension schemes, the government committed to remove the difference in treatment from all public service pension schemes.
The 2014/15 reforms also included a cost control mechanism - the "employer costs cap". The cap comprises a cost floor and a cost ceiling. The government paused the employer cost cap process on 30 January 2019 due to the uncertainty produced by the McCloud judgment. You can read more about this in our Insight.
What is happening now?
On 16 July 2020, HM Treasury published a consultation setting out the government's proposals for remedying the unlawful discrimination identified in the Court of Appeal's decision. Alongside this, the Ministry for Housing, Communities and Local Government and the Ministry of Justice are consulting on changes to the Local Government Pension Scheme and Judicial pension schemes, where different considerations apply.
The main consultation document explains that:
"Depending on a person's circumstances many scheme members are likely to be better off in the reformed schemes rather than the legacy schemes. The government believes it is therefore not fair to simply move everyone back into the legacy schemes, even though this would be sufficient to remove the unlawful discrimination identified by the Court of Appeal. The government therefore proposes to provide members with the option to choose between receiving legacy or reformed scheme benefits in respect of their service during the period between 1 April 2015 and 31 March 2022. This is referred to as the remedy period."
For most public service pension schemes, the government intends to offer this choice through primary legislation, which will take effect from April 2022. For the LGPS, the choice will be offered through regulations which have been issued in draft.
What about the cost cap?
The government has confirmed that the cost control mechanism process will be reactivated. The Treasury will set out in directions the technical detail of how the cost of the remedies required following the McCloud judgment should be taken into account in the cost control element of the valuations process.
Osborne Clarke comment:
These consultations are an important milestone in addressing the discrimination identified in the McCloud judgment. The question of whether the proposed changes will actually improve a member's benefits is likely to depend on the scheme and the member's personal circumstances. For example, modest earners in the Local Government Pension Scheme may be better off under CARE, while the position for judges is complicated by higher earnings and tax implications of the annual and lifetime allowance which did not apply in the legacy scheme.
The fact that the members of public service schemes other than the Local Government Pension Scheme will be asked to make a choice also raises the question of how those choices will be communicated and whether members will properly understand the decision they are being asked to take, or whether they might later argue they have made the wrong choice.