Members of public-sector pension schemes can now read HMRC’s detailed guidance on how the “McCloud remedy” is going to be handled.
The whole story began in 2015, when the government decided to change most public-sector pension schemes from a final-salary basis to a career-average basis.
For existing members – especially those with most of their working life behind them – the change promised to be confusing, uncertain and potentially disadvantageous, which led the government to introduce transitional rules. Unfortunately, the design of those transitional rules was badly botched.
What is the McCloud remedy?
The idea was to stagger the time at which individuals moved into the new style of scheme, based on how many years remained until their normal retirement date (NRD), measured from 1 April 2012.
Those with less time before NRD were allowed to continue under the “legacy” rules (which were, by and large, more beneficial to them), while members with longer to wait before retirement were straightaway moved to “reformed” schemes (which in many cases were less beneficial).
Now the observant among us immediately spotted the fact that “number of years remaining to NRD” is strongly correlated with “current age”, suggesting that the transitional rules were discriminating against younger members – which is unlawful under the Equalities Act 2010.
Sure enough, members of the judges’ and firefighters’ pension schemes raised this issue in the employment tribunal, which ended up as two 2018 cases (McCloud and Sergeant) decided – in the members’ favour – by the Court of Appeal.
Having lost the cases, the government accepted that the judgment was equally applicable to all the other public-sector schemes, and determined to undo the transitional treatment across the board.
The remedy itself
The basic principle for all schemes (other than judicial pensions and local government pensions) is that – regardless of whatever else might have happened in 2015 – the scheme administrators must “roll back” all members who had any “remediable” (pre-31 March 2012) service into a legacy scheme.
This is the case whether the member had remained within a legacy scheme all along, or had been moved to a reformed scheme either in 2015 or in 2022.
The deadline for the roll-back to have been made was 1 October 2023, so it should already have happened.
In this context, members includes:
- active members (those still working and accruing benefits within the scheme)
- deferred members (who have left the employment but have yet to draw benefits)
- pensioner members (who have already begun to draw benefits)
- deceased members.
The roll-back only applies to all benefit entitlement accrued between 1 April 2015 and 31 March 2022 (the “remedy period”). Any benefit accrual on or after 1 April 2022 will be in a reformed scheme.
Legacy is the default
In the absence of any elections to the contrary, the members who have been rolled back are to be treated as if they had never been in a reformed scheme but had remained in the legacy scheme throughout the remedy period. This means that qualifying members who take no action will automatically receive their pre-2022 benefits under the old rules.
To assist members in deciding whether to make an election, they will be provided with remediable service statements (RSS).
Administrators must, within 18 months of roll-back, provide all affected members with an RSS. This sets out a comparison of the value of the benefits accrued during the remedy period calculated on both the legacy and the reformed scheme rules.
Pensioner members and the beneficiaries of deceased members will have one year from the issue of the RSS to elect to have benefits under the reformed (career average) rules.
Active members must be issued with an RSS annually, while deferred members will only receive a new one if they request it – no more frequently than once a year. When applying to begin taking benefits, they may elect to receive them under the new basis.
Things that have already happened
A member who has now been rolled back into a legacy scheme may, during the remedy period, have experienced pension events that had been calculated under the new rules. These events must be recomputed.
For example, someone who was unaffected by the annual allowance charge (AAC) under the new rules might find that – under old rules – an AAC is now due. The scheme administrator is responsible for paying this charge.
On the other hand, the roll-back recalculation might mean that they have already paid too much AAC during the remedy period. If this related to the tax years 2019/20 to 2021/22, the members may claim a refund. For the years 2015/16 to 2018/19, they will not be able to claim a refund, but may be able to apply for compensation.
If the roll-back means that a pensioner member has retrospectively received too much pension during the remedy period, the administrator may choose to recover the excess (for example by reducing later payments). If they do not, the excess is treated as an authorised payment and remains taxable in the year of payment.
The roll-back will not affect members’ rights to a protected pension age below 55.
Local government pensions
Members of Local Authority schemes were all moved to career average schemes on either 1 April 2014 or 2015. As part of this move, certain “protected” members had what was termed the “final salary underpin”, which already meant that they were able to take advantage of the more beneficial of the two bases.
Under the terms of the remedy, this underpin is now applicable to any members with remediable service, regardless of whether they had hitherto been protected.
Judicial pensions
The pension arrangements of the judiciary have long been non-standard and complex – their “legacy” schemes were strictly not even registered pension schemes. I think it unlikely that members of the judicial schemes require any assistance from me in understanding the effects of the remedy on them, and this article will accordingly remain silent.
