McCloud remedy: Are some public servants more equal than others?

So any indignation I may feel at developments in the public service pensions space comes tempered with a hefty dose of realism. And so it is with the thorny issue of age discrimination in these schemes and how things should be put right. 

The issue stems from structural reform in 2015, when older ‘protected’ scheme members were allowed to remain in their legacy, final salary scheme indefinitely while all others transitioned to a new scheme based on career average revalued earnings, either at that time or a later date based on date of birth.

This difference in treatment was found to unlawfully discriminate against younger workers and the current McCloud consultations set out the government’s proposed remedy for this issue.

For the main unfunded schemes, this remedy falls into two broad parts. Under the first part, all members with service before April 1 2012 and from April 1 2015, will be asked to choose between legacy benefits and Care benefits for the period between April 1 2015 and March 31 2022 — the ‘remedy period’. Under the second part, all individuals who are still in service on April 1 2022 will transition to Care. 

Members’ choice guarantees fairness

The element of choice offered by the first part to this remedy ticks all my key fairness boxes. First, it means that those members who have actually fared better under Care than they would have under their final salary scheme are not forced to retrospectively accept lower legacy benefits.

Second, older protected members against whom no age discrimination has been found get the same choice — so, new inequities are avoided. 

The span of the remedy period means that protected members who previously would have been able to remain in their final salary scheme indefinitely, must now transition to Care if they are still in service after March 31 2022. 

As all impacted individuals will have attained their legacy scheme national pension date by that time, and subsequent Care accrual is as likely to be beneficial as it is detrimental due to the higher accrual rate, the remedy period also seems fair.

Finally, the same solution will apply regardless of membership status, so leavers and retirees will ultimately get the same choice.

A fair share for early retirees

So far so good, but what of the second part of the proposal to move all active members not already in the reformed scheme to Care for service from April 1 2022? 

Concerns have been raised in relation to the Police Pension Scheme that early retirement provisions under Care unfairly penalise younger members. While reductions to benefits taken before normal pension age may appear to support these claims, this common actuarial practice is in fact essential to the fair operation of the scheme. This is best demonstrated by way of an example. 

Let us consider two police officers — one retiring at age 55 and the other at age 59. They each have accrued a Care pension of £23,000, they each live to age 85 and their police pension in payment revalues annually by 1.5 per cent.

Before any adjustment, the officer retiring at age 55 would receive £138,569 more in benefits over his retirement compared with the officer retiring at age 59. However, once the appropriate early retirement factors are applied, the officer retiring at age 59 receives £17,279 more in total retirement benefits.

So however unpopular these factors are, they are simply helping to ensure that those retiring at a younger age do not receive more than their fair share due to their benefits being paid, on average, over a longer retirement period. 

As our subject is fairness, it is worth remembering that the reforms that led to the unlawful age discrimination were central to the government’s aim of ensuring quality public sector pension provision, which should also be affordable and sustainable over the longer term.

The second part of the remedy proposal is essential to fulfilment of those objectives — and a situation where that does not happen is unlikely to be ‘fair’ at all.

Moira Warner is senior intermediary development and technical manager at Royal London