The McCloud ruling

Background 

As things stand at present, those members of public sector schemes who were active in the “old” schemes as of 1 April 2012 and had pensionable service during the “remedy period”, being 1 April 2015 to 31 March 2022 for most schemes (but 1 April 2014 to 31 March 2022 for the LGPS) are potentially eligible for retrospective changes to service built up in public service pension schemes during the remedy period, due to the McCloud Judgment (providing they did not have a disqualifying gap in service during the period). 

The first part of the remedy for the McCloud ruling has already taken effect from 1 April 2022 by a) the closure of all of the “old” schemes on 31 March 2022 to any further benefit accrual, and b) the transfer of all active members to the “new” schemes on 1 April 2022. 

The second part of the remedy—which has a rapidly approaching deadline of 1 October 2023—will remove the transitional protections, and will primarily involve: 

• A return (or ‘rollback’) for members who moved to the “new” schemes back into the “old” legacy schemes for their pensionable service during the remedy period. 
• For their remedy service benefits, a choice of whether to receive “old” scheme benefits or “new” scheme benefits, both of which are payable from the “old” scheme.  This is referred to as the ‘choice election’ or ‘remedy election’. 
• Pensioner members have to make an immediate choice election, with this choice having to be made within 12 months of an immediate choice remediable service statement being sent. 
• For eligible active or deferred members, they will be able to make a deferred choice at the time when their pension benefits become payable. The deferred choice decision will become part of the process for members retiring or claiming deferred benefits. 

Matters are more complicated for “tapered” members of schemes—being those who did not transition to the new schemes on 1 April 2015 but had a later transition date—who will have to choose between whether the old or new rules will apply for the 2015–22 period throughout, which has the potential to run counter to the notion that “no-one will be worse off because of McCloud. 

Divorce 

So, how does the McCloud judgment and resulting remedy affect pensions on divorce? The February 2021 consultation run by HM Treasury glossed over pension sharing on divorce, and some schemes have recently started to consult on how they will allow for pension sharing in the context of McCloud.  Unfortunately, this is being done scheme-by-scheme, rather than holistically across all public sector schemes, which means that the schemes may take different approaches to each other.   

The remainder of this blog is based upon our interpretation of draft regulations issued by a number of public sector schemes: not only do we do not have any final regulations, but as noted above, it is also possible that approaches will vary between public sector schemes.  There remains a considerable lack of clarity over precisely how McCloud will be allowed for in the context of pension sharing. 

Let us first consider cases where we will be providing pension sharing on divorce reports after October 2023.  It is our understanding that from this date onwards, Cash Equivalent Values (CEVs) provided by the public sector schemes for the purposes of divorce will make allowance for the McCloud review in terms of being calculated on the basis of the higher valued benefits, and hence it should be “business as usual“ for such cases.  (This does of course assume that all of the schemes will be in a position to provide such CEVs as at October 2023, which remains to be seen, as is noted later.) 

Until that point, one solution for divorcing parties where either one or both of the parties have pensionable service in the remedy period is to consider waiting until October 2023 to proceed with pensions matters.  However, in many cases this is not an option, so in order to help progress cases we have for some time now been considering each case on its own merits, taking into consideration the particular circumstances, and suggesting pragmatic solutions to enable matters to proceed.   

The typical solution we have suggested has been to treat the pension benefits in the new scheme in isolation from the other pensions involved in the case.  In terms of pension sharing, this means having a PSO designed to equalise new scheme pension income or capital only, with a further PSO or PSOs being required over other pensions in order to create overall equality.  For offsetting we would assume that the PSO over the new scheme pension would still be implemented, such that any uplift awarded as a result of the McCloud review is shared between the parties.  

The reason for this approach is that for cases settled before October 2023 and where a pension which falls under the scope of the review has been shared, it is our understanding that if a pension credit is awarded to an ex-spouse in relation to remedy service benefits and it later transpires the pension credit would have been higher had the member’s benefits been treated as being in the alternate scheme, then the scheme manager must “top-up” the pension credit member’s account with additional benefits.  An important point to note here is that the original scheme member’s choice regarding their remedy period benefits will have no impact on the ex-spouse’s benefits for that period. 

The debits applying to the member’s pension benefits will also be adjusted.  For example, a debit which has been made over the new scheme pension benefits will become two debits, one over the pension benefits accrued April 2015 to March 2022 that have been rolled back into the old scheme, and one over the new scheme pension relating to post April 2022 service, both based upon the new scheme PSO percentage. (It is possible that there could be scope for further legal challenge here as to whether it is permitted to have multiple PSOs over the same record in respect of the same divorce, but that’s a subject for another blog on another day). 

The final category of cases is where PSOs are calculated before October 2023 but implemented after this date.  Each scheme has issued its own guidance as to how they might deal with such cases, with differing levels of detail, making it difficult to give a holistic view here.  However, it seems that at least some of them will apply the new scheme PSO percentage to the rolled-back benefits, which will now be in the old scheme, as described earlier in this blog. 

Another area of considerable uncertainty at present is in respect of cases involving tapered, or “mixed-service” pension benefits.  It seems, based on the draft guidance issued, that the member’s decision regarding their remedy benefits may have an impact on the benefits due to the ex-spouse, which runs very much contrary to the concept of clean break upon divorce. 

Also, and as we have been saying for some time, October 2023 seems an optimistic date for all public sector schemes to be ready for McCloud, particularly if we look back on other area of pensions where rectification action was required by the courts, the never-ending saga of GMP equalisation springs to mind.  Hence, we expect this timescale will slip. 

Conclusions 

As noted above, this is very much a summary of our understanding of the current situation regarding the McCloud remedy.  There remain many uncertainties and we are not confident that all of the public sector schemes will be ready by October 2023.  As with so many pension matters, it is very much a case of “wait and see”, frustrating though this is.