Government ponders solutions to £17bn McCloud problem

That discrimination, declared unlawful in the the Court of Appeal’s 2018 McCloud ruling, took the form of ‘transitional protections’ afforded to those closest to retirement, who it was thought would have too little time to prepare for the reforms to take effect.

Those within 10 years of their retirement were allowed to remain members of their legacy, final salary pension scheme in 2015, while everyone else was moved into the reformed career average schemes. The court found that this was unlawful discrimination against younger workers.

For public sector employers and in turn taxpayers, it represents a huge cost, which can only be borne either by cuts to services or higher taxes

Tom Selby, AJ Bell

The case has left the government facing the headache of seven years of lost reform, since it will have to unwind its changes until 2022. With as many as 3m people affected, the total cost of the reversal is estimated at £17bn.

Because some members will be better off in the new scheme, the government has chosen to retain member choice between schemes, either as an immediate choice or a deferred choice underpin.

Introducing the consultation, chief secretary to the Treasury Steve Barclay wrote: “Rather than just returning all members to the legacy schemes, I want to ensure that people who are better off in the reformed schemes can choose to keep those benefits... I also want to ensure that those who were closest to retirement age, and so were prevented from moving to the reformed schemes, will now have that choice.”

If members must make an immediate choice they would have to decide on their preferred scheme within two years of the date of implementation.

Under the DCU, the consultation document explained, “this decision would be deferred until the point at which a member retires (or when they take their pension benefits). 

“Until that deferred choice is made, all members would be deemed to have accrued benefits in the legacy scheme, rather than the reformed scheme, for the remedy period.”

Administrative headaches

In its document, the government acknowledged the scale of the administrative task ahead for affected schemes.

“The administration of immediate choice would be resource intensive and time pressured in the shorter term,” it stated. Contacting 3m people, who may no longer be public sector employees, would require the creation of entirely new IT systems.

“For the DCU, considerable work would be required in the short term to move many members of the reformed schemes back to their legacy schemes; and although the rest of the administrative impact of the DCU would be smoothed over decades, that would also mean maintaining the new systems for much longer.” 

The document continued: “Scheme administrators would probably need to run two sets of benefit designs alongside one another for over 30 years." Furthermore, the document suggests the risk of error could increase in the long term “if there were problems in retaining knowledge of the special features of benefit design for the 2015-2022 period in future decades”.

Reforms branded 'avoidable own goal'

Initial reaction to the consultation was mixed, with a number of commentators expressing relief it has finally emerged, while harbouring deep reservations about its consequences.

Steve Simkins, Partner at Isio, said: “Today’s consultation, which is all about choice, puts 3m public service pension scheme members in doubt about what their pension benefits will be and when they will be able to decide.

“Choice is good, but clear information and guidance is needed to make sure good decisions are made and these generous benefits are valued and understood.  The difference could run into thousands of pounds of pension a year for some.” 

Mr Simkins also highlighted that the costs of the reform will likely have to be met by members, and pointed out the irony of the government attempting to provide redress to victims of age discrimination by suggesting measures that will have to be paid for disproportionately by younger and future members.

Tom Selby, senior analyst at AJ Bell, was more scathing, arguing that “a £17bn public sector pensions bill”, surely among “the last things the government needed”, was the result of “a colossal and entirely avoidable own goal borne of the government’s desire to appease trade unions when the [2015] reforms were introduced”.

“In fact, Lord Hutton’s final report on the changes specifically warned age discrimination legislation meant it ‘would not be possible in practice to provide protection from change for members who are already above a certain age’,” he said. 

“The decision to ignore this advice has proven extremely costly indeed.”

Trade union Prospect welcomed the government's respect for member choice, commitment to not further diluting public sector benefits as a means of recouping costs, and agreement to suspend the cost cap, a mechanism that threatened to interact with McCloud.

Deputy general secretary Garry Graham said: "Prospect will assess the remedy against its three tests: scheme members getting a properly informed choice; full clarity on the tax implications; and anyone who has been disadvantaged must have that rectified by the remedy. These are not controversial demands and it is hard to see a situation where any remedy can be fair if it does not meet them."

LGPS schemes await answers

Though similarly affected by the 2015 reforms and the subsequent court ruling, the Local Government Pension Scheme is still waiting for its own specific consultation, said Ian Colvin, head of LGPS benefit consultancy at Hymans Robertson.

“Assuming the LGPS is treated in a similar way to the other schemes, we expect the proposed remedy to extend the ‘transitional protections’ underpin to all active members in the scheme as at April  2012, regardless of age,” he said.

Continuing a running theme, he warned this would require “a significant amount of administration and communication resource,” with the burden falling particularly hard on unfunded schemes.

“In terms of cost for the LGPS, the impact on contributions is likely to be less than 0.5 per cent of pay for the vast majority of employers,” he said, but warned that some members and employers would see a disproportionate impact.

Immature employers such as academies and leisure centres could see liabilities increase “by 5-10 per cent in extreme cases”, he said, although the proposal's restriction to members who joined before April 2012 should help.  

Maurice Titley, director at ITM, said collecting relevant data could prove tricky and urged schemes to complete assessments to segment their membership, identifying those most affected.

"The good news about the data is that it is predominantly only additional data from the past 5 years that will need the most work," he said, but added: "A complication can arise where employers may have changed payroll providers and the legacy data has not been transferred. Members with multiple service periods may also throw hurdles into the data work.

"Looking at preparing data for all 3 million members and calculating all scenarios will be like pushing water up a hill, but with pragmatic planning this needn't be the case."