The McCloud case Q&A for administering authorities - updated 17th July 2020*

This Q&A outlines the potential timescales and possible outcomes of the McCloud case and its impact on the cost cap process. Throughout it will refer to the 'cost cap' which is the Government's Employer Cost Cap process as required under the Public Service Pensions Act 2013. There are also references to the SAB cost management process which is both separate and additional to the cost cap. Further information on both these processes can be found back on the Cost management page of this site.

What is the McCloud case?

The case concerns the transitional protections given to scheme members, who in 2012 were within 10 years of their normal retirement age, in the judges and firefighters schemes as part of public service pensions reform. Tapered protections were provided for those 3-4 years younger. On 20th December 2018 the Court of Appeal found that these protections were unlawful on the grounds of age discrimination and could not be justified.

What are the potential implications of the case?

Those members who have been discriminated against will need to be offered appropriate remedies to ensure they are placed in an equivalent position to the protected members. Such remedies will need to be ‘upwards’ - that is the benefits of unprotected members will need to be raised rather than the benefits of protected members being reduced.

If the case is about the judges and firefighters schemes why does it apply to all public service schemes?

Protections were applied to all members within 10 years of retirement in all public service schemes, with the form that protection took varying from scheme to scheme. Although the case only relates directly to two schemes the government has confirmed in a statement by the Chief Secretary to the Treasury on 15th July 2019 that the principles of the outcome would be accepted as applying to all public service schemes.

Will there be a further appeal?

No. On 27th June 2019 the Supreme Court denied the Government permission to appeal. .

Why was the cost cap process paused due to McCloud?*

The Court of Appeal’s ruling means that significant changes to public service schemes will be required. Depending on the extent and cost of these changes there could be a material impact on the outcome of the cost cap process. While those changes and costs remained uncertain government took the view that the cost cap  process should be paused.

On 16th July 2020 the Chief Secretary to the Treasury announced that the cost cap process will be restarted but will take into account the costs of changing schemes to remove the age discrimination identified by the Courts. It is anticipated that the process will be complete early in 2021.

What has happened since the application to the Supreme Court was refused?*

The matter was referred back to the Employment Tribunals for remedy hearings. The Tribunals issued interim orders in October and December 2019 concerning the remedy that will apply to claimants in the and Firefighters Pension Schemes. The interim orders mean that claimants are entitled to be treated as if they had remained in the final salary scheme when the schemes were reformed in April 2015. The same remedy will apply to non-claimants who have been affected by the age discrimination and were members of a public service pension scheme on 31 March 2012. John Glen, the Economic Secretary to the Treasury made a Written Ministerial Statement on 25 March 2020 confirming the current position.

On 16th July 2020 HMT and MHCLG published consultations to remedy the age discrimination in schemes. In a written statement the Chief Secretary to the Treasury confirmed that the remedies proposed in the consultations will apply equally to claimants and non-claimants.

What happens next?*

Proposals concerning who is in scope for protection, the extent of final salary service protection and the effect on ancillary benefits such as transfer payments and survivor benefits are contained in the consultations published on the 16th July 2020 by HMT and MHCLG.

The SAB will continue to work closely with MHCLG and GAD to ensure that the remedy to remove age discrimination from the LGPS is robust and comprehensive. The SAB set up two working groups to assist with the development and implementation of the remedy. A policy group is assisting MHCLG with areas of policy that are not centrally determined. A larger implementation group is made up of member representatives, practitioners, employer actuaries and software providers and is considering the significant challenge of implementing the remedy.  

The consultations run until October 2020 after which the nature and timing of the primary legislation necessary to bring forward changes to the schemes will be developed. It is government’s intention for legislation to be in place by April 2022.

When would any changes to schemes be effective from?*

The consultations propose that remedies will be backdated to the commencement of existing protections in April 2015 (2014 for LGPS). It is our understanding that the Government’s stated intention to apply any changes to benefits resulting from the restarted cost cap process from April 2019 remains.

What LGPS protections are in scope for McCloud?

Unlike other public service schemes, the LGPS moved all members into the CARE scheme whatever their age. Those active members who were within 10 years of their 2008 scheme normal pension age on 31st March 2012 were protected via the statutory underpin. Protected members who meet the criteria for the underpin to apply, currently receive the better of their CARE pension or one calculated under 2008 scheme rules.

What else could be different for the LGPS?*

The HMT consultation proposes two options for choice for members of the unfunded schemes (such as Teachers’, Police, Fire, etc) that gave older workers transitional protection through continued access to their final salary pension schemes. In the LGPS, the position is different, as all members participate in the same career average scheme, with an automatic underpin for protected LGPS members to ensure they are not disadvantaged. The consultations do not propose that this general approach will change under the new arrangements. The MHCLG consultation also proposes that the current LGPS practice of including any increase in benefits as a result of an underpin for Annual or Lifetime allowance purposes statement in the year it is received will continue.

What remedy does the consultation propose for the LGPS?*

The MHCLG consultation proposes that a two-part revised underpin will apply to all members who meet the criteria for protection regardless of their age in 2012. The revised underpin will also apply to early leavers and will take account of early/late retirement adjustments. Membership up to earlier of leaving, 2008 NPA or 31st March 2022 will be included in the calculation of the revised underpin.

It is proposed that the revised underpin will extend to qualifying members who have left the scheme since April 2014 as well as active members. It will also apply on death in service and survivor benefits.

Would the SAB cost management process still run in the LGPS?*

Yes, it is the intention that the SAB cost management process (taking into account any remedies as a result of McCloud) would still run prior to the completion of the cost cap. Given the announcement of the lifting of the HMT cost cap pause the Board is currently considering its options regarding the pause of its process. 

Will benefit changes have to be backdated to April 2019?*

Once the restarted SAB cost cap process is completed the Board is committed to bring forward any resulting improvements to benefits costed on the assumption of an April 2019 effective date. However it is concerned about the confusion amongst scheme members which may be caused by the backdating of benefit changes over a potentially significant period and in particular the impact on those who will have left the scheme, voluntarily or otherwise, after April 2019 and prior to the implementation of any scheme changes. The SAB is also acutely aware of the enormous challenge that would be faced by administering authorities and employers in potentially backdating scheme changes over such a significant period, while at the same time implementing the McCloud remedies. It is therefore currently exploring legal and actuarial options to mitigate these challenges while recognising its obligation to bring forward changes that reflect in full the cost of any benefit improvements from April 2019.

Were any benefit changes from McCloud taken into account in the 2019 LGPS valuations?

LGPS valuations have taken account of what was known at the time about the timing and nature of potential changes to the scheme. Although valuations have taken into account what they were able to, depending on the eventual extent and cost of any remedy, an interim valuation may be needed to reset employer contribution certificates.