Headlines:
The McCloud consultation outcome (Public service pension schemes consultation: changes to the transitional arrangements to the 2015 schemes) was released today. The remedy will be the deferred choice underpin (DCU). This will enable eligible members to choose whether the legacy or reformed schemes would be better for them for the period between 1 April 2015 to 31 March 2022 at the point at which they retire with a pension.
The response also confirms that legacy schemes will close on 31 March 2022 and members will join reformed schemes from 1 April 2022.
In the meantime, members will be deemed to have accrued benefits in their legacy schemes for the remedy period, until they make their choice. The government will require annual benefit information statements for active members to refer to both sets of benefits.
Those already retired and/or received a pension award will be offered a choice as soon as practicable. The position they choose will be applied retrospectively to the date the award was made.
Actual processing will commence from 1 October 2023 or before if schemes can manage it.
Initial observations:
This is the sensible decision and was supported by most respondents to the consultation. It avoids the need for members to make assumptions around things such as their future public service career and retirement age, which would increase the risk of making an incorrect decision. It also results in a more manageable administrative challenge for schemes as the overall task will be spread over decades rather than just a few years.
It does mean that individuals will not have complete certainty as to what their retirement benefits will be, making retirement planning even more difficult than it is already.
It also crystalises some of the challenges that those of us who have been preparing for this have been considering for a while:
- It will require members to be provided with a detailed individual assessment, including key information, access to relevant calculations or independent professional advice – this could take many, many forms and so many potential difficulties are shrouded within such a simple sentence!
- For pensioner members who choose to receive alternative benefits to those already in payment, any additional amounts due will be paid from the scheme and subject to tax and any overpayments that arise will need to be repaid by the member – this is a sizable administration undertaking and the communication with pensioners, on an emotional topic, will be very important
- Whilst any overpaid tax charges arising from Annual Allowance breaches will be refunded, the details are so far silent on what should happen to any underpaid Annual Allowance – we are currently assuming these will need to be managed as was originally set out in the original consultation
- The consultation outcome appears to allow individual schemes to adopt their own positions on how they deal with contingent decisions (the: “I would have made a different choice had I had all the facts at the time…” scenario) – which will no doubt lead to some interesting discussions at scheme and member level