Articles - Are there any silver linings from the McCloud case

 By Barry McKay FFA, Partner and Fund Actuary at Barnett Waddingham

 As well as the benefit changes that may consequently fall out of the cost management process, we continue to work under a (Mc)cloud of uncertainty.

 An update is provided below, without any more weather related puns (until at least the end of the article!).

 Background to the changes in public sector pension schemes
 Based on the recommendations of the Hutton report, all public sector pension schemes were reformed in 2015 and benefits were changed going forwards. Alongside this, transitional provisions were introduced with the laudable aim of ensuring that any changes would not impact those members closest to retirement.

 However, these protections were deemed to be unlawful on the grounds of age discrimination. Although the Government applied to the Supreme Court to appeal this decision, this was denied on 27 June 2019.

 While the judgements are not about the Local Government Pension Scheme (LGPS), as rulings in public sector schemes, it has been confirmed that a remedy will need to be made across all public sector schemes.

 Why will LGPS costs increase?
 In the case of the LGPS, transitional protections were put in place for those members within ten years of retirement, when the benefits changed from 31 March 2014 (2015 in Scotland). These protections effectively act as an underpin and. as any remedy has to ‘level-up’ benefits between the current benefit structure and the underpin for a potentially wider group of people, this will inevitably increase costs for LGPS employers.

 Although the remedy is still unknown, is it likely that protections will apply to all members who were active on 31 March 2012 and the period of protection could be extended past ten years.  

 What will the increase in costs be?
 In short, we don’t yet know what the cost will be. The remedy is yet to be agreed and there will be associated implementation costs. There have been a number of estimates that vary from zero to double digits (as a percentage of liabilities), although it should be noted that this is on employer level. On a Scheme level, the range is much smaller.

 There are a number of decisions to be made on how levelling up will be applied and these will impact the cost. The simplest solution would be to extend the current protections to all members. Given the improvements in accrual rate (from a 1/60th to a 1/49th) and the low pay growth environment relative to inflation since the introduction of the 2014 Career Average Revalued Earnings (CARE) Scheme, you would expect the additional cost to be relatively small. This is because, for the majority of members, the protections will not bite.