Historically public sector pension schemes were defined benefit schemes, with pension benefits determined by final pensionable salary. In 2015, the Government reformed public sector pension schemes, introducing Career Average Revalued Earnings (‘CARE’) pension schemes. All members were moved to the CARE schemes unless they were nearing retirement, in which case, transitional protection was offered allowing them to stay in their legacy schemes.
Both McCloud, a member of the judges’ pension scheme, and Sargeant, a member of the firefighters’ pension scheme, argued in employment tribunals that the transitional protection granted to older members was discriminatory. In those tribunals the judges found in favour of McCloud and Sargeant. This was contested further but upheld in the Court of Appeal. The Government accepted discrimination existed in all public sector schemes where transitional protection was introduced and has subsequently taken steps to address this by virtue of the ‘McCloud remedy’.
Comparison of legacy final salary pension schemes and the CARE pension schemes?
Public sector pension schemes include, but are not limited to, pension schemes for the civil service, NHS, teachers, police, firefighters, UK armed forces and the judiciary.
Before looking at the McCloud remedy, it is helpful to compare the key characteristics of legacy final salary schemes versus the reformed CARE schemes.
I have used the NHS pension schemes as an example, however, the principles will not be dissimilar for other public sector pension schemes.
A comparison of the legacy NHS pension schemes (1995 and 2008 Sections of the NHS pension scheme) with the 2015 NHS pension scheme (the CARE pension scheme) reveals a number of key differences as shown in the table below:
Pension scheme
Normal
pension age
Pensionable pay used for
calculating benefits
Accrual
rate
Lump sum
1995 Section
60
Based on best
of last 3 years
pensionable pay
1/80th
Entitled to 3 x annual pension and
option to take a higher lump sum
2008 Section
65
Based on 'reckonable pay'
- average of the best consecutive
3 years' pensionable pay out of
final 10 years prior to retirement
1/60th
Option to exchange or 'commute' part of the
annual pension for a
lump sum in the ratio of receiving £12
of lump sum for every £1 pension given up
2015 Scheme
State
Pension Age
Based on pensionable pay
throughout employee's career,
revalued on an annual basis
1/54th
Option to exchange or 'commute' part of the
annual pension for a
lump sum in the ratio of receiving £12
of lump sum for every £1 pension given up
Final salary schemes are likely to be perceived as being better, with lower normal pension ages, higher pensionable pay and in some instances a lump sum without the need to commute. However, CARE pension schemes may be perceived as a better fit for those with flexible working patterns and variable earnings - particularly if someone were to reduce to part-time hours in the run-up to retirement.
Implementation of the McCloud remedy
The McCloud remedy is twofold. Firstly, all legacy schemes were closed to further accruals with effect from 31 March 2022, and all members moved into CARE schemes with effect from 1 April 2022. Therefore, all members are now treated equally.
Secondly, ‘eligible members’ will be given a choice – to be known as ‘the deferred choice underpin’ (DCU) - as to how they wish to receive the benefits for pensionable service during the period 1 April 2015 to 31 March 2022, known as the remedy period.
Eligible members are those who were a member of a public sector pension scheme on 31 March 2012 and who either (a) continued in service between 1 April 2015 and 31 March 2022 (or retirement date if earlier) or (b) left the service but returned within five years.
For eligible members, any continuous service accrued over the remedy period will be placed into their legacy scheme, provisionally from October 2023 when the DCU is scheduled to be implemented. Then, when their benefits become payable on retirement, they will be asked to choose whether they would like to receive their benefits for pensionable service from 1 April 2015 to 31 March 2022 under the legacy scheme or CARE scheme.
To aid decision-making, eligible members will be presented with two different pension entitlements, one based on pensionable service over the remedy period being aligned to the legacy scheme, and one based on alignment with the CARE scheme. Which will be more beneficial will depend on the individual circumstances of the member.
Those eligible members who have already retired, or retire before 1 October 2023, will be asked to make this choice retrospectively. The above will also impact those receiving a spouse’s or dependant’s pension for a late member who would have been considered ‘eligible’.
This second part of the McCloud remedy effectively removes the age discrimination which resulted from older members’ being able to remain in their legacy schemes rather than being moved to the CARE schemes.
What does it mean for forensic accountants instructed to calculate pension losses?
The DCU is expected to take effect from October 2023. As we are regularly instructed to calculate pension losses arising in personal injury, medical negligence and fatal accident cases, going forward we will need to consider if the Claimant is an ‘eligible member’ of a public sector pension scheme.
Where the Claimant is deemed to be an eligible member, it will be necessary to determine the value of their projected and actual pension benefits accrued over the remedy period under both the legacy scheme and the CARE scheme. It seems highly likely that the Claimant would have chosen the option resulting in the greatest benefit.
How we can assist
The forensic accounting team at Armstrong Watson are familiar with the various public sector pension schemes and can provide calculations of losses that consider the impact of the McCloud remedy. If you would like to find out more about how we are able to assist you in dealing with pension loss claims, please get in touch.
If you would like to discuss any of the issues raised in this article please don't hesitate to contact us at help@armstrongwatson.co.uk.
