McCloud remedy – adviser overview

Hello everyone and thank you for joining us for this webinar on the McLeod Remedy. Now my name is Justin Corliss. I'm joined today by Fiona Hanrahan and we are both technical marketing managers here at Royal London and specialize in public sector pensions.

We're both absolutely delighted to share with you what we know about the changes which may affect the pension benefits your public sector clients are entitled to. Now, although all public sector pensions sit within the same regulatory framework, there are some key differences in how the remedy will work for the main unfunded public sector schemes compared to how it will work for the local government pension scheme, the LGPS as we often call it. So, we've got separate webinars on each of these. Now, today's session relates to the main unfunded schemes and by that, I mean schemes for the NHS, the teachers, civil service, police, firefighters, and the armed forces. And just to ensure that we are all on the same page, we won't be considering the remedy for the judicial pension scheme, which is different again. But if you do have clients in that scheme and you have questions in relation to the McLeod Remedy, then please let you use your Business Development Manager know and we will endeavor to help as much as we can.

And to funnel this down a little further still, as this is such a detailed topic, we've split this presentation on the unfunded schemes into two sections. This first section, which is aimed at giving you a broad overview of the remedy in relation to the unfunded schemes, hence the name. But there's also a second presentation which considers the tax implications and other adjustments or corrections as we should call them, falling out of the remedy and provides some case studies. So, you can see that how all of that works in practice. Now we would suggest that advisers watch both of these, but if you feel you have a really excellent working knowledge already of the McLeod remedy and you really only want to explore advising in complex scenarios, then you could just watch the second session. To be clear though, the second session assumes somebody holds all the knowledge provided in this first section.

Of course, for this to be CPD able, we do need to have some learning objectives. So by the end of this session, you'll be able to describe the background to the issue, explain which members will be impacted by the remedy and explain at a high level how the remedy works. Okay, we want this session today to be of value to you. So, during this session our aim is to briefly explain why we are where we are now. So, to give you just a little bit of to those legal issues. Now we are going to explain which individuals are actually impacted by the remedy and how it will work and a breakdown of the decisions your client is going to have to make regarding the McLeod remedy and the factors which should sensibly influence that decision. So, in our first section we're going to briefly explain how we got to this unhappy state of affairs whereby the government is having to put right mistakes it made under equality's legislation.

Back in June 2010, the coalition government instructed a review of public service pensions with a view to ensuring that they remain sustainable over the longer term. We're all living longer, meaning public sector workers are spending longer in retirement and so their pensions are having to be paid out over a longer period and costing more. So the government wanted to ensure that the cost risk stemming from that longer life expectancy was shared in a fairer way with taxpayers. Now in its final report pictured on the left-hand side of the slide there, which you'll often hear referred to as the Hutton report, the commission which conducted this review recommended amongst other things that all members should be moved to a new scheme for future service and the government accepted all of those recommendations made as a basis for negotiations with the unions. But despite the report recognizing that those closest to retirement would actually be least affected by the proposed changes, the government agreed to concessions specifically designed to protect those closest to retirement.

And it did so because during negotiations with some key unions representing the workers that you see on the right of the scales there, they took the view that the oldest workers would have the least time to prepare for the changes and so should be insulated from them as a concession. So in agreement with those key unions, older members got a special deal. And long story short, what that special deal meant was that the older workers who met certain service and age criteria on the 1st April2012 were either partially or fully exempted from these changes. And these people are referred to as having full or tapered transitional protection. And because these terms are referred to so often what we've done is we've included them as a part of a key terms’ appendix at the back of this pack. But back to those transitional protections that older members enjoyed as a part of the reform, the full protection applied if the individual was 10 years or less from their legacy final salary scheme, normal pension age on the 1st April 2012, as long as they didn't have a break in service exceeding five years covering that period.

And if a client had full protection under the special deal, they were permitted to remain in their legacy final salary scheme until eventual retirement. Taper protection applied if the individual was more than 10 years, but less than either 13 and a half or 14 years, depended on the scheme, from their legacy scheme's normal pension age on the 1st of April 2012. Again, a condition for entitlement was that there was no break exceeding five years over this implementation period. And if a client had taper protection, they were allowed to remain in their legacy final salary scheme until a transition date to the reform scheme, which would've been sometime between 2015 and 2022 depending on their date of birth. So older members got a special deal and why does it matter those older workers got that special deal? Well, that's simply because members' legacy schemes were widely considered to be more generous.

Now, we'll hope to show you later on that that isn't always the case, but rightly or wrongly, that's the overwhelming perception. So younger members were understandably upset by this discriminatory treatment and it's this special deal which is generally referred to as transitional protections which have subsequently been found to give rise to unlawful age discrimination. So, the government needs to put things right across the public sector. There's a fine old master one pick and the government's way of doing that unpicking is known as the McLeod remedy after one of the initial claimants. Fiona's going to look at all of that next.

Thanks Justin. Hi everyone. So following consultation then, the government announced in February 2021 that they would be proceeding with a specific solution for putting things right in the unfunded schemes. And that solution is known as the deferred choice underpin or DCU for short. Not very catchy, I grant you, but it does what it says on the tin which we'll see. More broadly the solution is referred to as the remedy, and that's a term we'll be using to refer to the cloud solution for the rest of this webinar. So there are really two broad phases to the remedy, and the first of these is the prospective part of the remedy, and this was to ensure that no unjustified age discrimination continued beyond the 1st April 2022. The second aspect of the solution aims to retrospectively put right the age discrimination that has happened up to the 1st of April cut over date.
And because this aspect of the solution puts right what happened in the past, you may hear this referred to as the retrospective part of the remedy from a legal perspective, we initially thought the overarching framework for this retrospective part as it applies to all schemes. But now that we have the individual regulations for each of the schemes, we know how each of the schemes will apply these regulations. But let's deal first with the easier part. So, the prospective part of the remedy that swung into place was from the 1st April 2022. So fully protected members still in service on the 1st April 2022 who hadn't already been moved across to their reformed care were transitioned across at that point. So since the 1st April 2022, there are no longer any members accruing new rights in any of the main legacy final salary, public service pension schemes.

Everyone is now building up benefits on the same career average basis as the reformed schemes. And the government believes that in doing this, this is the best way of achieving its objectives of keeping these schemes sustainable for the longer term whilst also treating members equally. And it's been quite keen to point out in its consultation documents that it's the special concessions that older members enjoyed, which were found to be unlawful and not the reformed care scheme themselves. So, the perspective part of the remedy ends the unlawful discrimination going forward then. But the perspective part of the remedy still leaves the historic age discrimination unresolved because there's a bunch of older members who were still allowed to stay in the legacy scheme until the since April 2022, whereas younger members were moved across to care much earlier. So, what's the solution for this retrospective part of the remedy then?

Well, first of all, it's important to understand who is impacted by this retrospective aspect of the Remedy. So, starting at the top of our slides here, our first criteria relate to the member service history. They must have been a member of the legacy scheme before the 1st April 2012. And that's a key date because by then the reforms were already in the pipeline. So, the government takes the view that anyone joining from that date should have been aware that they were joining a scheme which was changing. The member must also have been in service on 1st April 2025, so had continuous service over that implementation period. But all was not lost for people who took career breaks at this time because individuals who were in service on or before the 31st March 2012, but subsequently left and rejoined are also in scope of the Remedy provided their break in service was less than five years.

And the key point here is that it's not just younger members who were discriminated against who are entitled to Remedy, older workers who benefited from the unlawful transitional protections were also in scope. Because it might turn out that they would have done better had the reform scheme. So you can't let younger members cherry pick their preferred benefits for the remedy period without older members too. Moving on to the middle box on our slide, if your client meets those service criteria, then they'll be entitled to remedy regardless of whether they've substituted or submitted regular claims or not. And that entitlement is automatic. And if the service criteria boxes are ticked, they'll also be entitled regardless of their membership status. Remedy doesn't just apply to active members, so deferred members, pensioner members, and even survivors of deceased members are all entitled to remedy as long as the member meets the service criteria on the screen.

Let's now look at the design of the remedy for those who are in scope. Despite what members may think, some people who've suffered the discrimination have actually built-up bigger benefits under their reform scheme than they would have under their legacy scheme. So, the government doesn't believe it would be right to automatically reinstate people into their legacy scheme as some people would lose out by that. So instead, what they're going to do is give everyone eligible a choice and that choice will be to either select legacy scheme or reform scheme benefits for that period, the 1st April 2015 to the 31st March 2022, or for as much of that period as they were in service for. And we're going to refer to this as the remedy period for the rest of this presentation and have included it in the key terms appendix that Justin mentioned earlier. Now this decision has to be made on an all or nothing basis, so clients won't be able to choose legacy scheme for one part of this period and reform scheme for the other part.

So, we need to know who's in scope and what choice they'll get. So, the next question we need answered is when will they get to make that choice? And the answer is that it's a decision they'll be asked to make when they come to claim their benefits and that will mean at retirement for most people. But that could also be a way off for many of your clients who are impacted. And that's obviously not ideal as it means large number of members won't have complete resolution for potentially many years to come. But the rationale behind this approach is that a decision made at retirement will be based on known facts including actual earnings data and membership history. So ultimately the decision your clients make at the point is likely to be more appropriate one for them. So, we know who's in scope, we know what choice they'll get and when they'll get to make it.

So, what happens in the meantime? Well, in the meantime, all eligible members who were transitioned to the reform scheme before the 1st April 2022 were reinstated back into their final salary legacy scheme with backdated effect for their remedy period. For example, your client was in the Civil service classic prior to moving to the reformed Alpha scheme, they'll normally have been put back into classic. If they were in the 1995 section of the NHS pension scheme prior to moving to the reformed care scheme, then barring any extenuating circumstances, they'll have been put back into the 1995 section. And this retrospective reinstatement applies to as much of the remedy period that the individual was in service for. And finally, as you can imagine, the implementation of all of this is a massive administrative burden for schemes. So they had until October 2023 to make all this happen. And in all honesty behind the scenes, it's likely to still be going on as an administrative battle.

So let's just bring all of that together by way of a summary then. Reform schemes were implemented with effect from the 1st April 2015, and those new schemes applied to new joiners and younger members. The oldest members with full protection weren't moved across to the new scheme at all. Other older members with taper protection were allowed to move across a date or a later date between 2015 and 2022 according to a schedule based on their actual date of birth. Under the prospective part of the remedy to end the age discrimination going forward, all fully protected members still in their legacy scheme were moved across to the reform scheme with effect from April 2022. And that ensures everyone is now accruing benefits on the same basis regardless of the age, but fully protected members could still have enjoyed seven years longer in their legacy scheme than younger members.

So to put right this historic discrimination, all eligible members were retrospectively reinstated into their legacy scheme for that seven year period known as the remedy period, and that reinstatement happened on the 1st October 2023. Then when they retire, they'll get to decide whether they want to keep those legacy scheme benefits for that seven-year period or whether they'll be better in the reformed scheme care benefits. And those two steps together form the retrospective aspect to Remedy, which is intended to end that historic age discrimination under the main unfunded schemes. So far we've mostly talked about the position for members who are still in service, but what about individuals who've already retired and who were in service over some or all of the remedy period or indeed. What about members who'll be retiring soon? Well, they get the same choice, but as schemes had until October 2023 to complete implementation of all of this, it may not be practically possible for existing members and retirees who are impacted to make their decision for some time yet.

That doesn't mean the people couldn't retire with benefits before October 2023. It just meant that there may be an adjustment to the amount of those benefits at a later date and that adjustment will be backdated as long as necessary. So it's not ideal and members of some schemes, the firefighters in particular are unhappy. These adjustments couldn't be done sooner for pensioners and retirees, and we appreciate or understand those difficulties trying to implement a solution as complex as this before the relevant legislation was laid would have been a bit like trying to nail jelly to the ceiling. And of course, have resulted in a whole new mess cascading down on everyone's heads. So unfortunately, these so-called immediate detriment cases, regrettably will have to just sit tight. I think it's fair to say that the McLeod remedy is complicated, and I think it's also fair to say that it's likely to be confusing and distressing for some clients. So how can we reassure them?

The first thing I think we should or could reasonably say to clients is that most of the work falling out of the remedy is going to fall on their scheme and not them, any moves between legacy and reform schemes happen automatically and clients should also be rest assured that the benefits they've built up in their legacy scheme are completely safe. Something else they might be pleased to hear is that they won't need to choose between legacy and reform scheme benefits in an information vacuum. And I suspect you'll be pleased to hear that too. It's a complex financial decision, there's no two ways about that. So schemes will be required by law to provide impacted members with regular updates via their annual benefit statements. And these will show the comparative values of their benefits under each scheme. So members will be able to see which benefits for the remedy period will give them the bigger pension.

And while it could be the legacy scheme benefits which come out on top, this won't always be the case. For active members, this information could be included on annual benefit statements from spring 2025 and deferred and pensioner members will also be given statements showing comparative numbers, although these will be one-off statements, but they can ask for subsequent ones. So cutting to the chase as an adviser, you won't need to worry about calculating or trying to guess which scheme is going to give your clients the better pension deal when that time comes. Their scheme will be obliged to give them this information by way of comparative figures on an ongoing basis. One more thing, there have been some other factors which clients need to think about a lighting from the option which will provide them with the biggest pension and Justin's going to be looking at that next. So back to you then Justin.

Thanks Fiona. So, in this next section we're going to look at all the factors clients and their advisers should at least think about before choosing between legacy and reform scheme benefits for the remedy period. But I think we need to acknowledge that for most clients, the option giving them the biggest pension will be the most important factor. So I'm going to cover that off first. And we've said that this will be the legacy scheme in all likelihood for many people, but that won't always be the case despite the perceptions out there to the contrary. So we'd suggest urging clients to try and keep an open mind. And just to prove that point, here's a quick example. This is Richard, he joined the classic section of the civil service pension scheme on the 1st April 2001. For those who don't know, classic is the brand name for want of a better word of one of the civil circus legacy schemes.

But anyway, back to Richard and as of the 1st April, 2022 he has 21 year service, he's 44 and he's aiming to retire at age 60 because that's when he'll be able to take his civil service classic benefits in full. So that's the age he's been expecting to retire since joining back in 2021. And as you can see there, his current salary is £51,200. So how do this numbers stack up for Richard? Well, if Richard chooses the legacy classic scheme benefits for the Remedy period, he'll end up with an estimated total starting civil service pension of £35,140 at his preferred pension age of 60. And he'll also get an automatic tax-free lump sum from the classic portion of his benefits of £54,265. And you can see those numbers in that teal-colored box there in the top right of the screen. But if he chooses the reformed alpha scheme benefits for the remedy period, he'll end up with a total estimated pension of £37,507 at age 60 together with an automatic tax-free lump sum from his classic benefits of £36,177.

Now I appreciate it's a little difficult comparing the two sets of benefits. Richard gets a much larger lump sum if he chooses the legacy scheme benefits, even though he gets a smaller pension. So what we've done here on this next slide is to level the playing field. So, the lump sum amounts are the same in either case, and we've done that by exchanging some of Richard's alpha pension so that his lump sum is the same size in either instance. As you can see here, even when we do that in accordance with the civil service scheme rules Richard's pension, if he chooses reform scheme benefits, is still bigger. In Richard's case, the reform scheme called Alpha produces the highest pension, although admittedly there's not a lot in it, but I do emphasize that the situation will vary according to circumstances. So, for example, you'll see at the bottom of the slide that we've made some assumptions about pay growth and CPI inflation.

Now if these assumptions were different, then that could change things and suddenly classic might give Richard the higher pension for the remedy period. And that's kind of the reason why members will be making their decision at retirement because we can model these things using assumptions, but they're just that, they're just reasonable guesses as to what might happen only at retirement when the member's pension comes into payment. Will all the factors which affect the amount of it be known, and I know I've said it before, but it's probably worth saying again, this is one of the key reasons why pre-retirement clients should keep an open mind about which scheme will provide the biggest pension for the remedy period. Now, as I've just said, it's one of the reasons why the scheme will be providing comparative figures as a part of the ongoing process. So even if you disagree that reform scheme benefits will sometimes provide the bigger pension, there's really no need to try and second guess this right now.

But the biggest pension isn't the only factor. Some thought will need to be given to the difference in ancillary benefits between the client's legacy and reform schemes. And by that I mean things like dependence benefits and ill health pensions. Key differences here mean it could be important for some clients to build up as much membership as possible in either their legacy or reform scheme depending on their circumstances. So, we're going to take a look at one such feature next.

Now regardless of the scheme, your client's in the benefits their family will receive if the worst happens need to be considered because choosing between legacy and reform scheme benefits could in turn impact the survivor benefits in respect of that seven year remedy period. And I'm going to show you an example of what this can mean by reference to the police pension scheme. So, as you can see from the first row on our slide here, that under the PP S 1987, that's the name of the earliest police pension scheme, aren't eligible for a survivor pension on the death of the officer. But cohabitants under the other schemes are.

And if your client's legacy scheme is the police 87 scheme and they are in a cohabiting relationship rather than a legalized relationship, they may not want to choose the legacy scheme benefits for the remedy period, even if it does provide a bigger pension because this will disentitle their partner to a survivor pension in respect of the remedy period. And the police scheme isn't a loan in not paying survivor pensions to cohabitate under earlier legacy schemes. This is also true of some of the other schemes including the civil service and the firefighter scheme. So, it's important to be aware that this could be the case and to watch out for it if you are giving advice to members on their McCloud choice. And from the second row on the slide there, you can also see that under the 87 schemes, the spouse or civil partners pension ceases if they form a new cohabiting relationship.

But that's not the case under the other police schemes. Now this may or may not be important factor for your clients. You never know. Some of you might even like the idea of a spousal pension stopping if they shack up with somebody else, but either way, it's something you need to think about and check off as a hygiene factor if you're giving advice in this space. Okay, next we're going to consider retirement plans, but I'm going to hand you back over to Fiona to take you through this and to the end of the presentation.

Thanks again Justin. So the third factor and final factor we need to look at is how eligible members retirement plans could also be impacted by the choice they make at retirement. Now this section isn't going to be a detailed exploration of all the rules about taking benefits in each and every scheme. We'd be here all day and I'm sure you'd lose the will to live. But we are going to try and give you some key principles and rules of thumb to work by and then you'll be able to investigate further in relation to any particular client if you need to. So if I may, I'm going to just start by looking at some basic principles. Because of the reforms, many clients will have a minimum of two portions of benefits, one or more in their legacy schemes and one in the reform scheme we've shown both portions the scheme size in this simple illustration, but in each practice the lion's share of older members benefits is likely to be in the legacy scheme.

And conversely, the lion's share will be in the reform scheme for younger members. And because of this, it's important to understand how and when those different portions of benefits can be taken because when your client makes their McCloud decision, they'll be increasing the size of either their legacy scheme benefits or their reform scheme benefits. And that in turn can potentially impact the amount of pension benefits they'll be able to take when they retire. And that's because different normal or minimum pension ages usually apply to these different portions of benefits. So let's take a closer look at that. So we've got a slide here showing the various stages at which public sector schemes have been reformed from pre noughties through to the most recent structural reform in 2015. And as a rule of thumb, each of those reforms has increased members' normal pension age in a trade off against exchange at a faster accrual rate.

And you can see those increasing normal pension ages in the first row of our table here. So in all schemes except the uniform services, normal retirement ages, now the individual state pension age, whereas it was 60 or 65 in the legacy schemes. Normal pension age in the uniform services remains lower, but has also still increased over time. And moving on to the second row of our table, if you layer on top of this the fact that different minimum pension ages apply to different portions of benefits, you can begin to see how choosing legacy or reform scheme benefits could potentially impact some members' retirement plans. So for example, a police officer with 25 or more years’ service in PPS 1987 will be able to take those benefits without reduction from age 50, but they won't be able to access the reform scheme benefits at all for another five years.

And at that point they'll be treated as a deferred member, meaning that their reform scheme benefits will suffer an actuarial reduction from the individual state pension age rather than the normal pension age of 60, which applies only to those retiring from active service. And so regardless of whether your client is in the uniform services or is a civilian, it's not hard to see how the ability to access benefits from certain ages is a factor to consider. And that's because when the member is making their McCloud decision, they're favoring one set of benefits over another for that seven year remedy period. So they'll be increasing the proportion of benefits they can access from a later or from an earlier minimum retirement age. And linked to that, the proportion of benefits they can access without actuarial adjustment from a later or earlier normal pension age. So if you're giving advice in this space, you'll need to make a broad assessment of the conditions and age under which your client can access their different portions of benefits and whether their plans remain achievable depending on their McCloud choice.

So plenty to think about apart from understanding the option which will provide your client with that biggest pension. So we're coming to the end of our presentation now, but as we promised earlier, we've included our appendix slides explaining some of the key terms here at the back of the pack so you can locate them easily later. There are two of these appendix slides as you can see here, covering the key terms. And I think that's all we're going to cover in this session, and I think you'll agree there's quite a lot to get our collective heads around. But if you're thirsting for even more knowledge in the McCloud remedy fear not as we followed or as we mentioned at the beginning of this session, there's a follow on presentation from this one entitled ‘McCloud Remedy Advising Clients Unfunded Schemes’. And I grant you, it's possibly not the snappiest title, but it does what it says in the tin like this one.

And also remember, if you have clients who are members of the local government pension scheme or LGPS as we call and they call it, there's a whole separate presentation altogether, which looks at how the McCloud remedy impacts them. You're probably aware that unlike all the other public sector pension schemes, LGPS is a funded scheme and that plus some significant differences in how the LGPS scheme operates is why it gets its own session. So I'll let you have another look at those learning outcomes and hopefully you feel that we've achieved these, and I'm just going to hand you back to Justin to finish off.

Thanks, Fiona. That's great. That bring us to the end of the presentation. We hope that you've found this beneficial. If you want further information, Fiona just mentioned that we have that follow on presentation. I think we'll change the name of it so that it's easier for people to understand because it's a bit too similar to this one. We'll probably just call it ‘taxation and corrections’, I think, because that's what it deals with. Just before I do go, I just want to take this opportunity, and I'm sure Fiona does as well, just to mention that even though these changes might be causing your clients some distress, their pension scheme remains extremely generous. So as advisers, you have a key role to play in helping ensure members don't make any rash decisions based on false perceptions. If any further information comes to light, we will do our best to communicate it to you. But in the meantime, we just want to say thank you very much for your time and goodbye.