Public Service Pensions Update | December 2021
Published on 20th Dec 2021
Welcome to the latest edition of our Public Service Pensions Update.
In this edition, we cover the latest developments on McCloud, remind you about the new rules for statutory transfers, flag a development in defined benefits superfunds and look at some recent Pensions Ombudsman decisions.
If you would like to discuss any of the developments in this newsletter, please contact one of the experts listed below.
Consultations | McCloud
The Department of Health and Social Care and Department for Education are consulting on draft regulations to implement the first phase of the McCloud remedy in the NHS and Teachers' pension schemes with effect from 1 April 2022.
The first phase of the remedy is to "make changes to the scheme regulations, in line with the Public Service Pensions & Judicial Offices Bill, which will close the legacy pension schemes to future accrual from 31 March 2022 and ensure all members who remain in service from 1 April 2022 do so as members of the reformed scheme[s]" to "ensure … equal treatment going forwards".
The Department of Health and Social Care's first-phase consultation for the NHS pension scheme is open until 20 January 2022. The draft regulations make changes to implement the first phase of the McCloud remedy. They also make a number of changes to the transitional regulations put in place in April 2015. For example, they introduce new arrangements for legacy scheme members who move to the new scheme on 1 April 2022 but are still waiting to hear the outcome of an ill-health pension application made before that date.
The Department for Education's first-phase consultation for the Teachers' Pension Schemes is open until 24 January 2022.
In our last newsletter, we reported that the Home Office, Cabinet Office and Ministry of Defence had opened similar consultations in connection with the police, firefighters', armed forces and civil service pension schemes.
The second phase of the remedy (choice of benefits for the remedy period of 1 April 2015 to 31 March 2022) will be implemented by separate regulations, and the government is expected to consult on these in 2022.
Immediate detriment cases | McCloud
The Home Office has withdrawn its informal, non-statutory, guidance on processing "immediate detriment" cases in relation to the police pension schemes and issued this update.
The update explains that HM Treasury's (HMT) view is now that "immediate detriment cases, including those yet to retire, cannot be processed before legislation [the McCloud Bill, scheme regulations changes and tax legislation], is in place without considerable risk, uncertainty and administrative burdens for individuals, schemes and employers".
As a result, "HMT and the Home Office do not advise that schemes process pipeline immediate detriment cases before the legislation is in place, given the uncertainty of how to proceed on some elements, and the significant risk of generating unintended tax consequences that may, to a greater or lesser extent, then need to be reversed once legislation is in force".
The original guidance was intended to support the payment of benefits to members who "become eligible to retire (for any reason, including ill health) and draw their pension and want to have all their benefits paid from their legacy scheme (i.e. do not accept 2015 scheme benefits)", before the legislation implementing the deferred choice underpin takes effect.
The update confirms that the "gaps and uncertainties are considerably greater than was previously thought. In some situations, it now appears that section 61 [of the Equality Act 2010] may not give all the powers required to operate the remedy smoothly and predictably, without generating significant uncertainty for schemes, and risking significant second or third adjustments for individuals.
The fundamental issue is that to support correction of immediate detriment cases before new legislation is in place, section 61’s impact on some fairly obscure aspects of the McCloud remedy needs to be understood. Any such interpretation of how section 61 comes into play on these points is novel and contestable, and actions taken on the basis of it are risky.
This risk has become more apparent over time, as HMT and HMRC have worked through the McCloud remedy and its tax consequences in more detail. On some of these points, the effect of section 61 would only be known for certain if it is tested in a court of law. This means schemes face significant uncertainty on how to proceed." …
"For cases that have already been dealt with, or are in the process of being dealt with, the new legislation will give powers intended to allow schemes to put these individuals into the correct position, drawing on the provisions of the McCloud Bill. However, this could entail significant second or third corrections and so HMT would not advise that schemes continue to process cases on the assumption these provisions will mean a smooth and predictable experience for themselves and for members."
Transfers | New rules and cold calling fine
In our last newsletter, we reported on important new rules for statutory transfers which came into force on 30 November 2021. The rules are intended to help protect members from pension scams.
The threat of pension scams has not gone away. The Information Commissioner's Office recently issued a fine of £140,000 to a firm which had instigated 107,003 illegal pension cold calls between 11 January 2019 and 30 September 2019.
Under the new rules for statutory transfers, schemes must check that one of two new conditions are met before they process a transfer to another scheme.
The first condition will apply in cases where the member wants to transfer to a public service pension scheme (as defined), a DC master trust on the Pensions Regulator's list of authorised master trusts, or a collective money purchase pension scheme on the Pensions Regulator's list of authorised collective money purchase pension schemes.
The second condition will apply where the member wants to transfer to any other type of pension scheme. Schemes will need to decide whether any "red" or "amber" scam flags are present. If one or more red flags are present, they must decide that the second condition is not met. If one or more amber flags are present, they must refer the member to Money and Pensions Service's MoneyHelper to take pension transfer scam-specific guidance.
In order to comply with the new rules, schemes will need to make a number of changes to their transfer processes, for example around due diligence, decision-making, record-keeping, delegation, privacy notices and records of processing activities.
In particular, the regulations require specific decisions to be taken, and specific tests to be applied when taking those decisions.
Funds should take legal advice as needed.
DB superfunds | First fund approved
The Pensions Regulator has announced that Clara-Pensions is the first scheme on its list of approved and assessed DB superfunds and has "demonstrated, through robust evidence, that [it meets] several criteria, including good governance, being run by fit and proper people and [being] backed by adequate capital".
Superfunds are consolidator schemes. The intention is that they will provide another "end game" option for private sector pension schemes (for example, as an alternative to winding a scheme up and securing all the benefits with an insurance company). The legislative framework for this type of scheme is not yet in place, but the Pensions Regulator has established an interim regime.
Pensions Ombudsman | Various
The Pensions Ombudsman has handed down decisions addressing a negligent misstatement in benefit statements, procedurally incorrect decisions in relation to abatement and recovery of overpaid pension, and a change of DC provider.
The Local Government Pension Scheme (CAS-32156-V4R7) – negligent misstatement
Partly upheld - a complaint by a member of the Local Government Pension Scheme that they had suffered financial loss as a result of being told, in deferred benefit statements, that they could defer taking their pension until they reached age 75. By the time the error was discovered, the member had lost the right to transfer to another scheme.
The Pensions Ombudsman decided that the council was liable for negligent misstatement. However, on the facts (the evidence suggested that the member's decision to remain in the scheme after the normal retirement date (NRD) had been based, at least in part, on a mistaken assumption that it would be possible to transfer out of the scheme after the NRD), this misstatement had not been the cause of any financial loss suffered by the member. It was also not clear that there would be a loss.
The member had suffered a loss of expectation and the member should receive a total of £2,000 in compensation for severe distress and inconvenience.
The Firefighters' Pension Scheme (PO-25374) – abatement and overpayments
Partially upheld - a complaint by a member of the Firefighters' Pension Scheme 1992 that their employer should have informed them that re-employment after retiring and taking pension could result in abatement of pension. The member had been asked to repay nearly £10,000 of overpaid pension after returning to work.
The Pensions Ombudsman reviewed the Scally v Southern Heath and South Services Board line of case law and confirmed that, while the employer had a duty to "make factually correct information available to [the member] it was not required to ensure that he received it". In this case, the member could have requested access to a Service Order containing information about abatement before re-starting employment. This said, the evidence did raise issues about the employer's handling of the member's re-employment and the ombudsman noted that the administrators of the 1992 scheme had since taken steps to raise awareness among members of the consequences of re-employment.
It was procedurally incorrect to apply a blanket policy of abatement, without considering the circumstances of a member's case or giving them the opportunity to make representations. It was also not clear whether the member had a defence against recovery of any overpayment.
The Pensions Ombudsman reviewed the defences against recovery of an overpayment and the principles of repayment plans. He directed the Fire and Rescue Service to pay the member £500 in respect of distress and inconvenience. He also directed it to invite the member to make representations, and then retake its decision on whether to abate. If it reached the same decision on abatement (a decision to abate) and recovery (member has no defence against recovery of the pension paid), it should consider the member's financial position. The repayment programme should not cause the member undue financial hardship and the repayment period should be at least equal to the period of time over which the overpayment occurred and not exceed the time limits on recovery set out in the scheme regulations.
Civil Service Partnership Pension (CAS-33671-DOP6) – change of DC provider
Not upheld - a complaint by a member of the Civil Service Partnership Pension in relation to the timing and adequacy of communications about a change of DC provider. The member did not feel that the change was beneficial to them.