Government to impose McCloud costs despite significant opposition

Proposals to roll over member contribution rates and to factor in the cost of the McCloud remedy in the 2016 valuation outcomes drew 1,257 responses, 1,253 of which objected to the plans.

The government has said it will press on regardless as there was no breach of the cost cap that could have justified changes to member benefits and contribution rates.

The results of this valuation clearly show that the scheme’s cost is 0.4 per cent lower than the employer cost. As it is within the 2 per cent flex specified in the Treasury’s regulations, there are no changes to benefits or member contributions

Penny Cogher, Irwin Mitchell

A controversial move

The Cabinet Office launched a consultation in November last year on how the McCloud remedy should be implemented with regard to members of the civil service pension scheme.

All members are being moved into the reformed scheme, called ‘alpha’, from April 2022, while the legacy scheme will be closed to future accrual from March 2022.

Its plans for calculating member contribution rates were contentious, however. The consultation explained that member contributions “are usually set every four years as part of the cost-control mechanism process”. 

“However, the cost-control element of the 2016 valuations was paused in light of the McCloud and Sargeant judgments, because the uncertainty around member benefits arising from these judgments made it impossible to assess the value of the schemes to members with any certainty,” it stated.

The cost-control mechanism resumed in July last year, and 2016 valuations were finally able to conclude in October, with the Cabinet Office announcing it planned “to roll over the 2021-22 member contribution rates in these draft regulations and we will consider whether any changes are required once the final results are determined”.

The plans to include McCloud remedy costs angered unions, however, several of which — including the Public and Commercial Services Union, the Fire Brigades Union, GMB, the Royal College of Nursing and Unite — have filed for judicial review in a bid to reverse the changes.

The unions argue that the government had promised that favourable outcomes to the 2016 valuations would result in increased benefits and reduced contributions, and that these favourable outcomes had in fact been achieved, only for the government to add on the cost of the McCloud remedy and thereby change the outcome.

Mark Rowe, national officer for the Fire Brigades Union, said in December: “The government is trying to make public sector workers pay via a scheme in their pensions called ‘cost control’.

“Cost control adjusts pension contributions or benefits if the actual cost of the pension scheme diverges from the target cost of the pension scheme by 2 per cent or more, with workers losing out if the actual cost is higher.

“It was the government who introduced the cost-control mechanism into the new pension scheme. The mechanism provided that savings from the new scheme should be passed on to those scheme members. The government now wishes to ignore the legislation that made that provision, legislation that they introduced.”

No breach of the cap

The government acknowledged the scale of the opposition, noting, however, that 1,239 of the 1,253 responses objecting to its plans were identical, with members using a template supplied by one of the unions.

These members argued that contribution rates should be determined based on the 2016 valuation outcome without the inclusion of McCloud costs, believing that the inclusion of those costs would be unlawful.

In response, the government said that the 2016 valuations “determined that the cost cap of the scheme is 0.4 per cent below the employer cost cap. As the result lies within the 2 per cent corridor specified in [Treasury] regulations, this means that no changes to benefits or member contributions are required as there is no breach to the cost cap”. 

“There are currently two judicial review applications against the inclusion of the remedy costs within the cost-control mechanism,” it continued, adding that “unless there is an adverse judgment at some point in the future requiring the recalculation of the 2016 valuation, we are required to base the contributions on the 2016 valuation which has just been concluded and which includes remedy costs”.

Garry Graham, deputy general secretary of Prospect, reiterated his union’s view that “the inclusion of the costs of McCloud is unlawful”. He added that Prospect is “monitoring legal action on this as an interested party”. 

“The Cabinet Office and the Treasury should finalise the cost-control mechanism without the inclusion of the costs of McCloud, and implement the Civil Service Scheme Advisory Board proposals. The SAB proposals had the full support of both the employer and employee representatives.

“The Cabinet Office must publish a timetable for finalisation of the 2016 cost-control mechanism and the completion of the 2020 valuation, including implementing member contribution rates from April 2023.”

Irwin Mitchell partner Penny Cogher told Pensions Expert, however, that the government had “outmanoeuvred the unions and the members here by completing the 2016 valuation on December 17 2021”.

“The results of this valuation clearly show that the scheme’s cost is 0.4 per cent lower than the employer cost. As it is within the 2 per cent flex specified in the Treasury’s regulations, there are no changes to benefits or member contributions,” she explained. 

“This means there is nothing for the individuals and unions to complain about. The members have to keep paying their contributions. Going forward, the changes require that active members move on to the alpha benefits from April 1 2022 for the accrual of benefits.”

The applications for judicial review have yet to be settled, however, and Squire Patton Boggs partner Victoria Jeacock said this made it difficult to judge the legality of including McCloud costs in the 2016 valuation.

“From the LGPS members’ perspective, the current position while we await the outcome of the judicial reviews is very uncertain, which in turn is unsatisfactory. Members need certainty over pension provision and costs,” Jeacock said.