1. Ending unlawful age discrimination (McCloud)
What’s the solution?
In a lengthy response to the consultation on changes to the transitional arrangements in the 2015 pension schemes, HM Treasury (HMT) has confirmed the mechanism by which it intends to remedy the unlawful age discrimination in public service pensions.
The deferred choice underpin (DCU) has been confirmed as the chosen approach for the main unfunded schemes Note 1. This means that all those in scope of the remedy will be asked to choose between legacy scheme (normally final salary) benefits and reformed scheme (career average) benefits for the period 1 April 2015 to 31 March 2022 (the “remedy period”). This choice will be given at the point of retirement.Until that point, all individuals in scope will accrue benefits under their legacy scheme for the remedy period. This will mean moving some individuals back to their legacy scheme.
On making their decision at retirement, members won't be able to pick and choose between the benefits under their legacy and reformed schemes. Nor will they be able to treat part of the relevant period as service under one scheme and part under the other.
The DCU approach
The DCU approach means that affected members won't have certainty over the eventual level of their pension benefits for many years, depending on their age. However, it does have the advantage that the decision to be made will be based on known factors rather than assumptions. It's therefore likely to result in better outcomes than the alternative approach tabled.
At the same time, the Government's confirmed that all scheme members in scope Note 1 will move to their respective reformed, career average schemes from April 2022. Although this means that legacy schemes will close on 31 March 2022, scheme administrators will have the flexibility to implement the changes by October 2023, in recognition of the scale of the administrative challenge.
Note 1: The approach described, together with the HMT consultation and response apply to: NHS in England & Wales, NHS Scotland, Teachers in England & Wales, Teachers in Scotland, Fire in England, Fire in Scotland, Fire in Wales, Police England & Wales, Police Scotland, UK Armed Forces, Civil Service In Great Britain and the Civil Service (Others) Scheme. The Judicial pension schemes, the Local Government Pension Schemes and all public service pension schemes in Northern Ireland have been the subject of separate consultations.
All individuals who were in service immediately before 1 April 2012 and after 31 March 2015 are in scope of the remedy. Additionally, all those who had a break in pensionable service over either or both of these dates will also be in scope, as long as the break was less than 5 years.
We'll be looking in more detail at the some of the impacts over the coming weeks. As a high level summary, advisers should be aware of the following:
- Pensioners: Those who have or will be retiring from their scheme before implementation will be offered the choice between legacy scheme and reformed scheme benefits as soon as is practicable. Depending on the individual’s choice, schemes will need to revisit pension awards and make retrospective additional payments/recover overpayments as the case may be.
- Annual/Lifetime Allowance: Moving between schemes alters the basis of benefit accrual and will result in changes to pension input for those individuals who are shifted back to their legacy scheme following the remedy implementation, and for those who choose reformed scheme benefits for the remedy period at retirement. Annual and Lifetime Allowance calculations may need to be revisited and overpaid tax reclaimed/underpaid amounts settled. We’ll be looking at the tax implications of the remedy in greater detail in a subsequent update.
- Contribution rates: For those schemes where contribution rates vary between the legacy scheme and reformed scheme, member contributions will need to be paid at the rate applicable to the scheme at which the member 's accruing benefits. This may result in a retrospective over or underpayment for an individual, reinstated into their legacy scheme at stage 1 and/or for an individual who selects reformed scheme benefits at retirement. Interest at a rate to be determined by the GAD will be applied to these over or underpayments and individuals will be permitted to pay any contributions owing either upfront or over time.
- AVCs: The Government's considering how members can retain rights to defined benefit entitlements bought with additional voluntary contributions and implementation methods are likely to be scheme-specific.
Deaths post 1 April 2015
- Surviving adults: These cases will be prioritised and schemes will automatically check whether a higher pension would be due under the alternative scheme and will pay the higher amount on agreement with the beneficiary. If the higher amount's already in payment, the beneficiary will be notified accordingly.
- Surviving eligible children: The member’s spouse or partner will have responsibility for choosing benefits. Children’s pensions will be unaffected by any decision related to choice of benefits where the decision-maker lives in a separate household from the child/children. Where the decision-maker lives in the same household, the usual rules apply.
Ill health retirees
Ill health retirees will be given the same options as other retirees. This has the following implications:
- The claims of ill health retirees have normally been assessed against the criteria which applied under the scheme of which the individual was a member, at the time they retired on ill-health grounds.
- The option to select benefits under the alternative scheme for the duration of the remedy period the individual was in active service also means that the retiree’s scheme will need to consider whether the individual met the criteria for ill-health retirement in the alternative scheme at date of claim.
- If the criteria are met, the scheme will provide details of the alternative benefits which would be available and the member may choose those instead of the benefit in payment.
- Where the criteria for ill health retirement under the alternative scheme aren’t met, the scheme will advise on the retiree’s options. This could be to retain the benefits already in payment or otherwise, or a deferred pension or actuarially reduced pension under the alternative scheme, depending on the member’s circumstances.
- Annual benefit statements: Schemes will be required to produce statements giving additional information on remedy period benefits under both schemes, so members are able to make an informed choice at retirement.
- Contingent decisions: Schemes will individually consider cases where the member believes they 'd have acted differently in relation to their pension, had it not been for the unlawful age discrimination. This is subject to a claim being made by the member and suitable evidence being provided to the scheme.
Those meeting the service criteria will be given the same choice regardless of whether they are still in active service or whether they are a deferred or pensioner member.
Teachers whose schools are leaving, or have already left TPS should therefore rest assured that they will also be able to choose between final salary and career average benefits for the remedy period.
The decision teachers will be asked to make at retirement makes it more important than ever that their scheme administrator (TPS/SPPA/DENI) has up to date contact details. For teachers in England & Wales and Scotland, a good way to keep in touch with TPS benefits is to register for My Pension Online on the TPS/SPPA website.
Schemes should automatically provide annual benefit statement showing benefits under both the individual member’s legacy scheme and their reformed scheme for the remedy period so members will be able to see which benefits provide the bigger pension. However, there are other factors to consider including (in some schemes), different contribution rates, different pensions for families in the event of the member’s death and different ill-health benefits. Schemes are likely to provide guidance to members on all of this in due course, but in the meantime, advisers may wish to begin thinking of the “hygiene” factors to consider with their clients, to ensure that the advice process is sound and all relevant issues considered.
Additionally, members should be encourage to review their pay and service histories now(ish) and throughout their careers. It could be difficult for scheme administrators to resolve any queries many years into the future.
Moving schemes will alter members’ pension tax position as it will alter benefit accrual. For some, this may trigger a new or amended tax charge. Advisers may therefore wish to consider recommending to clients that they retain paper copies or access to:
- Tax returns from 2015/16 onwards
- P60s for 2015/16 onwards
- Other documentation relevant to their income or earnings from 2015/16 onwards
- Pension savings statements provided by their scheme
- Any Annual Allowance carry forward calculations (including those which pre-date April 2015)
The government will now bring forward primary legislation to bring to an end the unlawful age discrimination and establish the framework set out above. Regulations setting out any lower level detail and giving effect to the framework will then be subject to individual scheme consultation.
Where can I find out more?
More detail on the proposals being taken forward can be found in the Public service pension schemes document.
2. Cost control mechanism, employer contributions and member benefits
Now that the Government has decided on its approach to the McCloud remedy, it has also set out what will happen if the 2016 or 2020 scheme valuations show that the costs of providing benefits to members is higher, or lower than expected.
The 2016 valuation process will be completed and will take into account the costs to each scheme of ending the unlawful age discrimination using the deferred choice underpin remedy approach, as set out above.
The outcome of this in some schemes could well be that the cost of providing benefits to members was more than the tolerance under the so-called “cost cap” or “cost control mechanism”. This would normally mean that members’ benefits would have to be reduced or employee contributions increased going forward. However, the Government has stated that it will waive any such benefit/contribution adjustments.
If, on the other hand, the 2016 valuation for any scheme reveals that the costs of providing benefits to members was less than expected, the Government will honour the increase in member benefits/reduction in employee contributions, to which scheme members would be entitled with effect from 1 April 2019.
The decision described above relates to the 2016 valuation only. The Government Actuary is currently reviewing the cost control mechanism to determine whether it works as intended, and a future policy will be set out once that process has concluded.
Changes to employer contribution rates
Changes to employer contribution rates were due to be implemented from April 2023. However, the McCloud remedy implementation, and the review of the cost control mechanism are among the factors making implementation by that date highly problematic. The Government's therefore exceptionally decided to delay any change in employer contribution rates until April 2024.
What does it mean for independent schools?
Independent schools now have a little breathing space before any change in employer contribution rates takes place and to manage their wider risk of financial shocks. Advisers should note the possibility that in the event of an increase to employer contributions in 2024, this could potentially be higher than would otherwise be the case to pay for the delayed implementation.
3. NHS Pension Scheme flexibilities
In late 2019, the Government consulted on proposals to mitigate against the risk to NHS service delivery caused by clinicians declining additional work or responsibilities as a result of pension tax issues, predominantly caused by the tapered annual allowance. The consultation included a number of proposals to introduce new flexibilities to help clinicians manage their pension tax liabilities. The consultation also proposed changing the “Scheme Pays” methodology employed to calculate the pension debit to make the system more transparent.
In its consultation response, published on 5 February, the Government confirmed that it wouldn't be proceeding with the proposed flexibilities as it has implemented a solution under the pension tax system instead. The increase in the threshold and adjusted income cutovers by £90,000 each is estimated to take more than 95% of consultants and GPs out of scope of the taper.
The Government will also not be proceeding with the proposal to change scheme pays methodology as the alternative method's likely to be very marginally more expensive for members. However, in the interests of transparency, the Government does intend to work with the scheme administrator to ensure that the year-on-year value of scheme pays deductions are shown on benefit statements.
Advisers may be interested to note that the consultation response includes some examples which demonstrate that (in the opinion of the Government), the impact of scheme pays deductions is proportionate to the value of the benefit accrued.
Finally, the consultation response highlights availability of a ready reckoner which allows members to assess their annual allowance position including whether the taper might apply. This tool currently works in respect of tax year 2020/21 only and is accessed via the NHS Employers website.
Where can I find out more?
More details are available on the NHS Pension Scheme pension flexibility webpage.