Govt to consult on McCloud solution as new members could be worse off

A dispute brought by firefighters and judges in March 2015 – known as the McCloud and Sargeant cases – argued that by protecting older members from a downgrade to their defined benefit pension accrual, the government was discriminating based on age.

In a ruling handed out in December 2018, the Court of Appeal agreed that discrimination had taken place, and in June 2019 the Supreme Court refused the government’s application to appeal the court case, which marked the end of the legal process.

To right this wrong, the government will probably have to reinstate public sector workers to the closed 2015 scheme, with an initial estimate that remedying the discrimination will add about £4bn a year in liabilitiesacross the board.

However, the home office has now warned that some members may be worse off when moved back to the old scheme, and last December announced plans to launch a public consultation, following a series of technical discussions with stakeholders.

The government will want to avoid rushing to conclusions if it wishes to avoid another legal challenge. There are a number of public service pension schemes affected by McCloud, so this will take a while to get right

Daragh McGinty, Osborne Clarke

Transitional provisions took different forms, allowing older judges and firefighters to remain members of the old schemes, either until retirement or until the end of a period of tapered protection, dependent on their age.

The difference in treatment will in due course be removed for all members with relevant service across all the main public service pension schemes – not just those who have lodged legal claims, the government noted.

“Any solution will need to ensure that all members can instead keep the pensions they have earned to date,” the Home Office stated.

Younger members could be worse off

The Home Office factsheet was issued after the ruling of an employment tribunal in December ruled that more than 6,000 firefighters are entitled to return to pre-2015 public sector schemes.

The government said that for the firefighters’ pension scheme, some members are likely to have been better off remaining in their old scheme, while others may benefit more from the new scheme – that will depend on the individual circumstances of affected members.

Daragh McGinty, legal director at Osborne Clarke, explained that the original DB schemes, which were closed as recommended by Lord Hutton’s Independent Public Service Pensions Commission, “tend to favour long-serving high earners because benefits are referable to salary just before retirement”.

The new career average revalued earnings schemes, introduced in 2015, “are calculated by reference to average salary over an individual’s career, which tends to favour low to modest earners”, Mr McGinty explained.

Catherine McFadyen, head of public sector actuarial, benefits and governance at Hymans Robertson, gave the example of the Local Government Pension Scheme Care plan, where a member accrues 1/49th of their salary for each year of service, compared with 1/60th of salary for each year of service in the old final salary scheme.

“This is then revalued up to the point of retirement in line with the consumer price index in the new scheme, and in line with the member’s own pay increases in the old arrangement.” 

She explained: “One-forty-ninth is a more generous amount than 1/60th (by around 20 per cent) so the member’s pay increases have to outstrip inflation by around 20 per cent over the period to retirement in order to be better off under the old arrangement.”

The Home Office stated that technical discussions will be held with the Firefighters’ Pensions Scheme Advisory Board, which comprises members of the Fire Brigades Union, the Fire and Rescue Services Association, the Fire Officers Association and the Fire Leaders Association, as well as employer representatives.

These discussions will consider changes to the schemes that are necessary to remove discriminatory provisions for non-claimants; and to ensure individuals can keep benefits they have accrued regardless of changes needed to remove discrimination – for example, if they would have been better off in the new scheme, the document stated.

However, Mr McGinty warned: “Ultimately, the combination of member experience and the differences in benefit structure between final salary and Care mean that it may not be possible to know whether members are better off in one scheme or the other until the member approaches retirement.

“It remains to be seen whether the remedy to McCloud is to include some form of underpin test in the scheme so that members are not worse off when they reach retirement,” he added.

Consultation to come after discussions

Following the discussions with the Scheme Advisory Board, the government will formally consult on its proposals, providing a further opportunity for input, it stated.

Mr McGinty explained that the government is required to consult on any changes to public service pension schemes under the Public Service Pensions Act 2013.

“One might argue that government is slightly ahead of the curve by consulting on changes before the courts have decided the solution to McCloud, but there’s no arguing that garnering the views of all stakeholders is a good thing.”

However, Mr McGinty is not expecting a quick fix to this case.

He said: “Much depends on what the courts decide in terms of final remedies and how quickly they reach their conclusions, plus the government will want to carefully review all o the responses to the proposed consultation.

“Certainly, the government will want to avoid rushing to conclusions if it wishes to avoid another legal challenge. There are a number of public service pension schemes affected by McCloud, so this will take a while to get right.”