This week the latest statement on the potential solution to the long-running McCloud saga was submitted to parliament. The McCloud issue stems from the transitional arrangements included in the public sector pension reforms introduced in 2014 and 2015 which have since been deemed age discriminatory. John Glen, Economic Secretary to the Treasury, has outlined that consultation on how this discrimination will be removed will take place later this year. His written statement noted that:
- Members will not need to make a claim to ensure that changes apply to them
- Members will get an as yet undefined choice between benefits*
- It is anticipated that the choice may have an impact on an individual’s tax position
- Any solution to Public Sector Cost Cap mechanisms which were paused in January 2019 will be considered alongside any McCloud remedy
Whilst most of the above is in line with expectations based on what’s been said previously, the devil is always in the detail. The most interesting part of any consultation for members, scheme managers and providers will almost certainly be the ‘choices’ that members will have.
Choice should be welcomed as an overall concept. Currently there is a misconception amongst members that the changes implemented were negative for all members of all ages in all scenarios. “Old scheme equals Good; new scheme equals Bad”. But this is not the case. There are common, real life, scenarios across the breadth of public sector scheme designs where members will be better off as a result of having moved to their ‘new’ scheme.
Immediate vs Deferred choice
As a result it’s almost certain that members who are impacted by the discriminatory nature of the changes will be able to select between their ‘old’ scheme and the ‘new’ scheme they were transitioned into. What is therefore of more interest is when and how that decision will need to be made.
The obvious options are either asking impacted members to make a choice now or at a future date when they are claiming their benefits.
From a member’s perspective the latter option would allow for a more complete set of information to underpin selection of the most beneficial outcome for them. However this will come with significant complexities which all stakeholders will have to deal with for decades to come.
The first key and complex issue of addressing discrimination will be which future life events would constitute a decision point for members and whether that decision is subsequently reversible under any circumstances. That, however, is far from the only major challenge. Not only will we need to work through these other challenges, but the solutions to these will need to be maintained until the last impacted member has been asked to make a decision. The outcomes of this consultation could mean significantly increased costs of running public sector pension schemes for the next 50 years.
Member communication – Where the member has a better of two options at a future point this is surely just an underpin and that’s something the pensions industry has dealt with before, right? Unfortunately no. It’s not that simple. In some cases the ‘old’ scheme might be better under a normal retirement scenario and ‘new’ better under an ill health or bereavement. That’s hard enough to explain in a narrative document like an Annual Benefit Statement, but throw in the complexity of digital communications (pensions dashboard anyone?) and modelling tools, and it will take a pensions professional to understand what might be payable.
Administration – A future choice will mean the preparation of two different calculations under differing sets of rules at every impacted member event up until a choice is made. Requirements for systems development and skilled administrator capacity will inevitably lead to a long term increase in cost of provision of these services.
Data – The data required for the ‘old’ final salary type schemes and the ‘new’ CARE schemes is different. This could have repercussions throughout the data supply chain from employers through their outsourced payroll/HR providers and on to schemes/administrators. Developing systems and maintaining the integrity of this data will be an extra overhead for a greatly extended period.
Member’s pension options – The options that a member has around the pension they build up are often different in the ‘new’ and ‘old’ schemes. By deferring the choice until a future date, how will a member be able to decide if they want to pay AVCs?, opt out? or buy extra pension? An alternative solution would be to look at aligning the differing member options. Changes like this would be fraught with complexity and almost certainly lead to some members being disadvantaged again and would potentially give rise to further legal challenge.
Taxation position – As this week’s statement outlined, an individual’s tax position could be impacted by the choices they make. If that’s the case then does their historic position/annual allowance carry over? Will it flip-flop on an annual basis based on the member’s temporary choice at that time? Or is it based on the more valuable benefits at that time? If so under what life scenario? How is this balanced against the potential different contribution rates/tax relief faced between ‘new’ and ‘old’ for some elements of the public sector? All of this will not only confuse members, but be almost impossible to administer for pensions providers and HMRC alike.
Conclusions? Or just more questions?
These are not the only complexities that will be faced under a future option scenario, but they do start to highlight the problem.
Most of the pain can be avoided under a more pragmatic, immediate, one-off choice (something that has been used in public sector pensions in the past). This option obviously risks some individuals’ life experience leading to a lower benefit in certain circumstances, but is that the price worth paying instead of 50 years of complexity, cost and confusion for everyone?
* Whether this applies to a scheme like the LGPS who may already have a solution in the underpin that exists for members protected by the offending transitional protections is another question still to be answered.