McCloud funding impact ‘minimal’ but MHCLG needs to step up

Julie Baillie, actuary at Barnett Waddingham, told the conference that as many as 80 per cent of members will not have an underpin, though most employers will have some members in what she called the “Goldilocks group”.

The McCloud remedy “should not be causing fear and alarm for the majority of employers, though there will be exceptional cases”, she said. The exceptions are likely to be among smaller employers with fewer members, and employers that have awarded higher-than-inflation salary increases in the past.

“If we knew [in 2019] what we know now, we estimate that the remedy — had it been applied in time — would have increased future service cost or primary rate by about 0.2 or 0.3 per cent of payroll, as an average for all employers,” Baillie said.

“We estimate it’s been an increase in the total liabilities of around 0.3 per cent as well, which would worsen the funding position, so would lead to an increase in secondary contributions […] on average, we estimated that also to be of the order of about 0.3 per cent of payroll.”

“My takeaway so far is that we just need to stay calm about the funding impact, so there’s no need to buckle under the pressure,” she added.

However, Janet Morville-Smith, head of risk and compliance at the Local Pensions Partnership Administration, said that the administrative challenge of implementing the remedy was likely to be “the biggest challenge for administering authorities since the introduction of the [career average revalued earnings] scheme itself”. 

“It’s estimated that around a quarter of the total fund membership will fall into scope for the remedy. There are many different aspects of work that will need to be carried out to implement the remedy and administer the changes once they take effect,” she explained.

“In its consultation, the Ministry of Housing, Communities and Local Government didn’t envisage that many members will actually see an increase in benefits as a result of the remedy. However, the calculations will still need to be carried out for a large number of members, both on an ongoing basis and as a retrospective exercise for leavers.”

Morville-Smith noted that MHCLG’s consultation response has still not been published, and stressed that there are “a lot of areas that need more clarification”.

“The current underpin calculation doesn’t take into consideration the fact that the normal retirement ages in the 2008 and the 2014 schemes are different,” she continued.

“Under the current rules, a member must leave with an immediate entitlement to benefits in order to qualify. As this could lead to further discrimination, this has now been omitted from the draft regulations within the consultation.

“So does that mean in future, that the underpin will also apply to leave us with deferred benefits?”

Morville-Smith also cited uncertainty about the tax treatment and how the underpin could affect the lifetime and annual allowances. 

“I would say that there is still a lot of work needed by MHCLG and HM Revenue & Customs to provide the detail that we need to be able to administer the remedy,” she said.

MHCLG is still analysing the responses to the consultation it launched in August, with a formal consultation response expected later this year.

Jenny Bullen, actuary at the Government Actuary’s Department, said: “Given we know what the position is in relation to the other public sector pension schemes, we expect that the transitional protections will cease with effect from March 31 2022, and it’s likely the requirements to implement the statutory underpin in the LGPS in England and Wales and the other schemes will need to be in place by 2023.”