"The McCloud judgment was a landmark case of public service pensions age discrimination that the Government is now forced to unravel."
The key issue was how to address the age discrimination inherent in the way the latest round of public sector pension reforms were implemented. In particular, workers below a certain age were automatically moved to a new pension scheme but those closer to retirement were able to stay in the old (‘legacy’) arrangements. This approach was ruled unlawful by the courts and in response the government has been consulting on how best to address this.
The two options were:
a) An ‘immediate choice’ where millions of teachers, nurses and civil servants would make a choice now as to which scheme they wanted to be members of for the period from 2015 to 2022;
b) A ‘deferred choice underpin’, where members would stay in their ‘legacy’ scheme but could opt at retirement for the alternative scheme if this would produce a larger pension; workers will have to trust that this provision will not have been changed by the time they retire;
The Treasury has today announced that it will be implementing a ‘Deferred Choice Underpin’. However, this means that members of these schemes will not know for certain what rules will apply to their pension until they retire. They will receive forecasts of their pension based on their legacy scheme, but their final pension may turn out to be different if the alternative scheme would have been better.
Former pensions minister Steve Webb said that schemes will now face a "huge communications challenge" in ensuring that members understand the calculations and can verify them, and to make sure that this new complexity does not lead public servants to become disengaged from their pensions.
In addition, for some workers there will be complex tax implications to be resolved if they end up switching schemes at retirement.
Steve Webb said: “It is understandable that the Treasury would opt for a ‘deferred choice’ where members can look back and see which scheme would have been better for them. But between now and retirement this means that members will simply not know what their pension is going to be and will also have to hope that future governments keep this promise. This will make retirement planning even more uncertain. Pension schemes will need to retain the ability to work out pension rights under two different arrangements for decades to come and will have to be able to explain those calculations so that members can check if they are correct. Members will need clear communications about where they stand and support in understanding how their pension has been worked out. There is no doubt that unpicking this mess will lead to decades of complexity and uncertainty for public service pension scheme members.”
Graham Crossley, NHS pension expert at Quilter, commented: “The McCloud judgment was a landmark case of public service pensions age discrimination that the Government is now forced to unravel. The case found that by protecting older members from a downgrade to their defined benefit pension accrual, the government was discriminating against younger ones based on age. We are now at the stage where things must be put right, but this is far from straightforward and the amount of administrative burden on members and schemes alike will be a substantial weight to bear when people barely have the mental or physical capacity to do so.
“Government has made a sensible call to allow a member to decide at retirement which pension scheme is used for their membership during the remedy period. However, the problem is far from over and scheme members still have reams of complexity to deal with when coming to a decision.
“Initially all members will get put back in their legacy pension for the remedy period, so there will be many pension members that will have to recalculate their Annual Allowance liability going back to 2015. If the AA charge is reduced retrospectively then the member will be able to get Annual Allowance compensation. In our experience this could impact a substantial population, including thousands of doctors. And the sums are substantial. Already we have seen doctors get thousands of pounds back. However, this isn’t a straight forward journey and it is likely that many will need professional advice to get this resolved accurately.
“In fact members will still need to check their pension record is accurate in the first place. In January alone, Quilter advisers saved nearly £350k in AA charges for NHS pension scheme members due to spotting errors in their pension records or the processing of their award.
“The government have also acknowledge that some people may have made decisions about their pension based on the information available, including leaving the scheme. Given the legal challenge with McCloud there was a need to think carefully on how to ensure these people are not disadvantaged. The government has decided to allow members to rejoin the scheme retrospectively on a case by case basis, if the member could demonstrate that they would have stayed in the scheme had the legacy scheme remained an option for them. This puts substantial pressure on the members to evidence their decisions. There will be lots of doctors, along with members of other schemes, that have opted out without a full understanding and will be impacted by this. This is where specialist advice will be needed so they can evidence properly and have someone fight their corner.
“When a member rejoins they will need to catch up on contributions. However, there was a lack of detail on how this would work and if there will be a payment schedule to ensure the catch up contributions are affordable and attract fair tax relief.
“It is unfortunate the government to do not appreciate the financial confusion they are putting on members. Expert help is vital for impacted members and the Government really should be the ones funding it.
“Meanwhile, yesterday a separate consultation confirmed the Government’s view that tinkering with the annual allowance taper will resolve all the annual allowance issues in the NHS. These issues should not be underestimated as they mean that some doctors are refusing overtime or retiring early to avoid hefty tax bills.
“Changing the annual allowance will not solve the issue. In fact a number of effected doctors may feel compelled to continue to risk their family finances. We’ve heard instances of some regular opting out and in of the scheme to manage their pension growth, this is far from a good outcome.
“It is shameful that doctors are continually charged absurd tax on their pensions for doing their job and Government are not acting.”
