For members of the public sector pension schemes the McCloud judgment is something that many members have heard of. Not many, especially in the LGPS, know how it affects their pension benefits.
Legal background
The McCloud case was the legal challenge raised by Judge McCloud about how the new Career Average Revalued Earnings (CARE) schemes were introduced. He claimed it was age discrimination as people were moved depending on their proximity to retirement. The Court of Appeal agreed and this had to be rectified. This is the McCloud remedy.
LGPS background
In the LGPS all members moved from the 2008 final salary scheme to the CARE scheme on 1st April 2014. However certain members were given transitional protection – referred to as the underpin – depending on how close they were to retirement. The underpin provided protection that a member’s pension benefits could not be lower in the CARE scheme than what they would have been in the final salary scheme.
The age criteria applied to the underpin was deemed to be age discrimination under McCloud. Therefore, the age element of the underpin criteria was removed. Now, the underpin applies to members who meet the following criteria:
- Active in LGPS on or before 31/3/12
- Was a member of the CARE scheme
- Does not have disqualifying gap in service (more than 5 years)
Unlike other public sector schemes, members will not be given a choice. Their benefits will be calculated on both bases and the higher of the two will be paid.
When helping clients within the LGPS, many advisers are unaware of how the McCloud judgment affects them. We know of cases where some assume it works in the same way as the NHS and Civil Service pension scheme. In those cases, members will be put back into the 2008 scheme up until March 2022 and then have a choice at retirement. In the LGPS this is not the case. By setting this out here, we hope it will provide some clarity.
What we think
Some of the individuals we work with often assume that the 2008 section is better as it is a final salary scheme. However, CARE schemes are linked to inflation. Therefore, in current times when inflation is outstripping pay, they find the CARE benefits are higher than they would have been in the 2008 section.
LGPS members don’t receive a breakdown of what their benefits would look like as there is no choice involved – whatever option is higher will be paid. At Pen-gage we are able to set this out for members so they can have full financial details to help in their wider retirement planning