Public Sector Pensions and the McCloud judgement consultation outcome

This consultation was a result of a Court of Appeal judgement (The McCloud Judgement) in December 2018 that ruled that transitional protection in the judges’ and firefighters’ pension schemes gave rise to unlawful discrimination.

The Government accepted that the same issue applied to all Public Sector schemes and has been working to fix the discrimination identified. Essentially, those nearer their normal retirement age could stay in the legacy schemes whereas other, younger, members were forced to move to the 2015 schemes, and this was ruled as discrimination.

To rectify this the same transitional protections are being offered to all members who were in service on or before 31 March 2012 and on or after 1 April 2015, whether they are currently an active, deferred or pensioner member.

The protections will cover the seven year remedy period, which is from 1 April 2015, when members were moved into the 2015 scheme until 31 March 2022. The protection gives relevant members a choice of which scheme they accrue benefits in during the remedy period.

The consultation proposed two options, an immediate choice option and a deferred choice underpin option.

The Government confirmed that it will implement the deferred choice underpin which was favoured by most of the respondents to the consultation.  

With the deferred choice underpin option, the member initially will be reinstated into the legacy scheme but given the option at retirement to choose to access benefits using the reformed scheme rules, thereby deferring the choice until retirement.

This option holds a clear advantage over the immediate choice option as the member will be able to make direct comparisons of their actual entitlements available under both schemes at the time they take them. The immediate choice option would require the member to make assumptions of which scheme would provide them with the best outcome.

Following the remedy period, on 1 April 2022, the consolation response also confirmed that all legacy schemes will be closed for future accrual and all members will be moved to the 2015 schemes.

Although the deferred choice option makes the advice decisions more straightforward it still causes annual allowance complications.

All members will need their annual allowances recalculated for the remedy period. In addition, if, when they come to take benefits, they revert to the reformed scheme their tax position would need to be assessed again.

Where a recalculation of the annual allowances show that the member owes tax, this would be recouped for the four tax years before the implementation. This should therefore be any additional taxed owed for tax years 2018/19 – 2021/22. Where the member has overpaid tax, the Government will repay this without time limit.

Where a member decides to revert to the reformed scheme on retirement, where an annual allowance tax charge arises from the choice, the scheme will compensate members for the charge.

In addition to the annual allowance calculations, any members who have taken benefits will need their Lifetime Allowance test recalculated if they revert to the legacy scheme and again any taxes due paid or refunded.

Some schemes also have different contribution rates between the schemes and these and the subsequent tax positions will also need to be considered.

All this will create considerable complexity and clients are likely to be seeking assistance from financial advisers to help. However, until the schemes provide member’s with revised pension input figures there is little that can be done. The schemes are unlikley to be able to provide these details until late 2022 at the earliest.

The key thing for now is to ensure any clients who are, or have been, members of a public sector scheme during the relevant period are aware of the need to keep their records. This will be particularly important for those who have been subject to tapering and those that have previously exceeded the annual allowance.

There is also the issue of those who have made decisions based on the previous position, particularly the decision to opt out of a scheme to avoid annual or lifetime allowance charges. The consultation confirmed that in these cases there will be no automatic right to reverse any decisions and these will be considered on a case by case basis.