This is our third (and final) blog of 2023 that relates to the implications of the McCloud ruling on the sharing of pensions and divorce. The purpose of this blog is to provide an update to family solicitors on what we have seen happen since the McCloud remedy implementation day of 1 October 2023.
The background to the ruling in the McCloud case and what this means for those who have accrued a public sector pension has been covered in our previous blogs and a webinar. Links to all of these (plus blogs on other matters) can be found here: https://mcact.co.uk/category/blog/.
In brief, the McCloud ruling relates to the transitional protections that were put into place prior to the transfer of most public sector pension scheme members from a final salary pension scheme to a career average (or CARE) scheme. In general, this transfer meant that pension benefits accrued from 1 April 2015 were to be accrued in a new CARE scheme. The transitional protections allowed those who were closer to retirement to remain accruing pension benefits in the legacy final salary schemes beyond April 2015, with some members (known as fully-protected members) continuing to accrue benefits in a final salary scheme until 31 March 2022. There are differences in the benefits structure of the final salary schemes and the respective new CARE schemes, including different rates of benefit accrual, increases to accrued pension benefits and normal retirement age. Some of these are more generous in the CARE schemes, some were more generous in the final salary schemes and for some, such as how accrued pension increases, depends on individual circumstances.
The transitional protection measures referred to above have been ruled to be age discriminatory. The impact of this ruling is that, for most public sector pension schemes, members who were accruing pension benefits as at 31 March 2012 and also as at 1 April 2015 (including those with a break in service of less than 5 years) will be able to choose whether to have their eventual pension benefits, considering accrual over the “remedy period”, determined a) as if those pension benefits were accrued in the relevant final salary scheme or b) in the CARE scheme that replaced the relevant final salary scheme. The “remedy period” is the period from 1 April 2015 (this being when accrual started in the new CARE schemes) to 31 March 2022. The choice in respect of remedy period pension benefits is made just prior to retirement, where the pension is not yet in payment. For those who have retired, it is understood that between now and April 2025, they will be provided with the information required under new legislation (as discussed below) that is intended to allow them to make a choice.
From 1 April 2022, every contributing member (including fully-protected members) will have accrued a pension in the CARE scheme, as the final salary schemes were closed to all accrual on 31 March 2022.
Those who benefitted from the transitional protections are also known as members with tapered protection. Rather confusingly, the administrator of the Teachers’ Pension Scheme has now started to refer to any scheme member that has pension benefits that come under the scope of the McCloud remedy as a “transitional member”.
The timeline below summarises the key dates that pertain to the McCloud ruling remedial work.
The impact of the ruling differs for some public sector schemes such as the Judicial Pension Scheme, the Parliamentary Contributory Pension Fund and the Local Government Pension Scheme (LGPS). For example, in the LGPS, under the transitional protections, older members benefitted from an underpin such that pension accrued on the CARE terms that applied from 1 April 2014 will be no less than what would have been accrued under the terms that applied prior to 1 April 2014. As a result of the McCloud ruling, this underpin will now apply to any LGPS member who was in pensionable service on 31 March 2012. The underpin applies to pension accrued to 31 March 2022 (or earlier leaving or retirement).
1 October 2023 was the McCloud implementation day on which the regulations needed to implement the remedy came into force.
Putting the LGPS to one side, on 1 October 2023 public sector pension schemes had to establish dual records for each member affected by the McCloud remedy. The first record, being the new default record, should detail pension benefits for the 2015—22 remedy period as if accrual had been rolled-back into the legacy final salary scheme. The second record should detail the resulting pension benefits, in respect of the same period of accrual, as if they had been accrued in the relevant CARE scheme.
In addition to the establishment of dual records, the new legislation requires that when a CEV for divorce purposes is provided after 1 October 2023 (and no decision has been made in respect of which of the dual records to accept as being the one upon which pension benefits should be based) the scheme should provide a CEV/CEVs, in respect of those affected by the McCloud ruling, that reflects whichever of the dual records results in the higher CEV. It is then this CEV (updated to the relevant point) that is used to work out the awarded pension credit following the implementation of a PSO.
The regulations also include provisions that are to apply where a CEV was provided prior to the establishment of dual records on 1 October 2023. This was covered in this earlier blog. However, in brief where CEVs were provided prior to 1 October 2023, and if the member does not have any transitional protection, then if a PSO over the CARE pension has been settled on, this PSO will be applied to a) 1 April 2015—31 March 2022 pension benefits that will have subsequently been rolled back into a final salary scheme and b) any CARE pension that relates to accrual from 1 April 2022.
In summary, what we have seen is very much a mixed picture and is indicative of the administrators of the public sector schemes seeming to be in a state of limbo.
Across all public sector CEV quotations that we have seen since 1 October 2023, just one appears to have been determined in line with the new legislation. Top marks go to Hampshire Pension Services for the provision of a CEV, in respect of a member of the Hampshire & Isle of Wight Firefighters’ scheme, that clearly states that it has been calculated in line with the new requirements.
Unfortunately, this is as good as it gets at the current time. For example, I have contacted the pension administrators for each Police force to ascertain whether they are able to provide CEVs in line with the October 2023 regulations. Just two out of the thirteen administrators confirmed that they can provide CEVs in line with the current regulations. Other responses indicated that what could be provided would vary on a case-by-case basis or that whether a suitable CEV can be provided would depend on whether the member was currently in service or not. Clearly, there is currently inconsistency between what the administrators of a single set of schemes are doing and it is possible that what some administrators are doing is inconsistent with legislation, for example, we have been provided with Police Pension Scheme CEVs that make no allowance for the McCloud remedy, despite being provided after 1 October 2023. The new regulations do not cater for the treatment of CEVs on divorce that have been calculated after 1 October 2023 but not in line with the rules!
There are around 15 different entities that administer pension benefits for current and former employees of the various fire and rescue authorities, with Hampshire Pension Service being just one. We suspect that the inconsistencies set out above also exist between the administrators of the Firefighters’ Pension Scheme.
We have received information from the administrator of the NHS Pension Scheme, NHS Pensions, that indicates that they are not currently providing CEV quotations. In fact, NHS Pensions say they are waiting for guidance from the Government Actuaries Department (GAD) on how to calculate CEVs and it is not clear when calculation of CEVs will recommence. Even so, since 1 October 2023, we have still received CEV quotations from NHS Pensions but these have not been calculated in line with the new regulations. It appears that—as a temporary measure—NHS Pensions have simply provided CEVs of pension benefits after the 1 October 2023 roll-back, even if this is not the CEV of whatever are the more valuable pension benefits accrued over the remedy period.
We understand that solicitors have concerns about the risk of using CEVs that were calculated before 1 October 2023. I suggest that what may be risky, given that the new regulations include provisions for CEVs calculated prior to 1 October 2023, is the use of CEVs calculated after 1 October 2023 but not in line with the regulations that from 1 October 2023.
Turning now to another big public sector scheme, the Teachers’ Pension Scheme; we have been advised by the administrator, Teachers’ Pensions (Capita Pension Solutions), that provision of CEVs may be subject to delays.
As for the LGPS, the position is complicated as this is made up of a number of county-wide funds, with numerous different administrators. A recently published guide for these administrators states:
All of the above indicates that there may be delays, inconsistencies and possibly errors in the information we require to produce PODE reports. Despite this, we remain committed to continuing to produce PODE reports where McCloud issues are pertinent. Sometimes this may involve the use of workarounds. For example, if provided with CEVs that are calculated in line with the new regulations but not with details of the pension benefits that are reflected in the CEVs, given we have access to the factors used to calculate the CEVs and fully understand the specific benefit structure of each scheme, we can work backwards from a CEV to derive the pension benefits that are being valued. Using such workarounds, we will progress as many cases as possible.
In cases where we do not have full information on the impact of the McCloud ruling, we may make a judgement call and decide that any possible change to pension benefits is not material. For example, if the pension benefits that may receive a McCloud uplift make up 10% of total pension assets, a 30% uplift to these pension benefits equates to as 3% increase in overall pension assets, with all of the increase being on one side. On the other side, there could be a defined contribution fund that has increased by 5% or 10% since the date of valuation. In such circumstances, a MCL PODE may well decide that it is not proportionate to stall progress whilst full information is sought. Again, our detailed knowledge of the public sector schemes allows us to estimate the quantum of possible uplifts and make these judgement calls.
Any workarounds or judgement calls will be fully explained in our PODE reports. We will also highlight what may go wrong. One risk that we have identified is the risk of administrators treating PSOs that have been derived using pre–October 2023 CEVs as if they were derived from post October 2023 CEVs. That is, the risk of administrators not following the new regulations that specify the mechanics of pension debits and pension credits depending on whether CEVs were provided before or after 1 October 2023.
A combination of the materiality of changes to pension benefits arising as a result of the McCloud ruling and a lack of reliable information from scheme administrators may mean that there are certain cases for which a useful PODE report cannot be produced. This may include members of a public sector pension scheme that benefitted from transitional protection and for whom it is essential that CEVs that meet the October 2023 requirements are provided. Such cases will be the minority and are expected to reduce in number with time. In such circumstances, the reasons why a useful PODE report cannot be produced will be clearly explained.
The issues are not going to be resolved in the short term and we intend a) to remain abreast of what the various administration entities are doing and b) to keep you updated on developments in this area over the coming months (and perhaps years).
It is hoped that the issues highlighted in this blog are not exacerbated by the forthcoming changes in administration in two of the largest public sector pension schemes. In 2025, Tata Consulting Services (TCS) will replace Capita as administrator of the Teachers’ Pension Scheme. It is understood that the transition to TCS will commence shortly. Also in 2025, Capita will replace MyCSP as administrator of the Civil Service pension arrangements.
We have given one example of when an expert may be able to deem that the implications of the McCloud ruling are not material, having considered what proportion of pension assets are subject to change and the quantum of the possible change.
There are other instances where it may be concluded that the McCloud ruling is not pertinent. This may include:
The team here at MCL can easily identify these straightforward cases, allowing PODE report production to progress without pausing to request unnecessary information.
CARE scheme – The new 2015 (or 2014, in the case of the LGPS) schemes which are career average schemes.
Final salary scheme – the legacy schemes in which members accrued pension benefits prior to 1 April 2015, with pension benefits determined with reference to specific scheme’s definition of final salary at retirement (or earlier exit).
Fully protected member – someone who—on account of their age—did not accrue any CARE scheme pension prior to 1 April 2022.
Remedy period – the period from 1 April 2015—31 March 2022.
Transitional protections – protections put into place that allowed older members to continue to accrue final salary pension benefits after 1 April 2015 (and possibly until 1 April 2022, if qualifying for full protection). These are sometimes referred to as tapered protections.
On a final note, we here at MCL wish you all, your families and your colleagues all the very best for the festive period and for 2024.
Rahim Rashid
Principal Report Writer
