The McCloud judgement

17 January 2022

Mathew Akrigg ACIPP, policy and research officer at the CIPP explores the complexities of the McCloud judgement, and how this impacts public sector pensions

By now you may have heard about the McCloud judgement. Although case law is not always terribly exciting, it is extremely important. What does this mean for payroll, pension schemes and what else does it affect? While the schemes involved are for public sector employers, there are aspects of the judgement that may be important to consider in other areas of employment law.

What happened to cause all the fuss?

To answer that, we must go back to 2010, when the coalition government organised for an Independent Public Services Pension Commission to review public sector pensions. The report, released in March 2011, ahead of the budget, recommended the final salary scheme be replaced by a career average earnings scheme. The plan was to move existing members across to the new scheme once this had been set up. They also advised to link normal pension age to the state pension age to mitigate against life expectancy risks, apart from schemes for uniformed services which would sit at 60. The government accepted the Commission’s recommendations and put the Public Service Pensions Act 2013 into legislation.

The Commission stated it was ‘not possible in practice to provide protection from change for members who are already above a certain age.’ However, on 11 November 2011, the chief secretary to the Treasury, announced age-related transitional and tapered protection would be introduced. He said: “I have listened to the argument that those closest to retirement should not have to face any change at all. That is the approach that has been taken over the years in relation to increases to the state pension age, and I think it is fair to apply that here too. […] No-one within ten years of retirement will see any change in when they can retire or any decrease in the amount of pension they receive.” This is taken from: http://ow.ly/2sXb30s6WSZ.

Transitional protection meant that members within ten years of normal pension age would stay in their existing schemes. Members between ten and 13.5 or 14 years of normal pension age could stay in schemes for a brief period – this was tapered protection. All other members would be required to make the change to the new 2015 reformed scheme. These protections are what caused an issue and all the ‘fuss’.

What was the McCloud judgement?

Members of the judges’ (McCloud) and firefighters’ (Sargeant) pension schemes argued in the employment tribunals (ETs) that transitional protection given to older members was unjustified direct age discrimination. In December 2018, the Court of Appeal ruled that the transitional protection offered to older members did constitute age discrimination.

The government confirmed that, even though the case related to the judicial and firefighters’ pensions, the judgement will affect the main public service schemes managed by the government (responsibility may be devolved for Northern Ireland, Scotland and Wales). Some of the schemes included are:

civil service pension schemes
National Health Service pension schemes
teachers’ pension schemes
police pension schemes
firefighters pension schemes
UK armed forces pension schemes
local government pension scheme
judges pension schemes.

The Supreme Court refused the government’s application to appeal, this means that the Court of Appeal’s decision will stand, and therefore needed to engage with the ET to agree on remedies.

What will happen now?

Different schemes have conducted their own discussions to determine appropriate remedies and the vehicles they will be delivered through. HM Treasury opened a consultation, running from 16 July-11 October 2020, discussing two options to remedy the unlawful provisions. The consultation response can be found here: http://ow.ly/NsUY30s7H8n.

The remedy for both options is the same – members will get to choose which of the legacy or reformed schemes they wish to receive the benefits of for the remedy period. This period is 1 April 2015-31 March 2022 and applies to all members who were in service on 31 March 2012. Members who started service after this date were ineligible for any protections regardless of age and were therefore not identified as being discriminated against. Members with tapered protection will be treated the same as all other members, choosing from the two schemes, not a mixture of both.

The two options proposed by the government consultation regarded the method of choosing which scheme benefits to take. The first option was the immediate choice (IC) method, members would be required to decide as soon as possible after April 2022, effectively locking in their choice well before retirement. The second option being the deferred choice underpin (DCU), where the choice is made at the point where the benefits become payable.

In the consultation response, it was identified the IC method could result in further discrimination to younger members. IC would mean a decision would be based on many more assumptions the further the member was from retirement. It would also be detrimental if a career break was taken, as it would be impossible to predict when, and how long, such a break would occur.

The consultation proposes moving forward with the DCU method. This will allow all members to choose the scheme that benefits them the most at the same stage in their careers.

The DCU method is not without its issues, there are some tax implications of DCU that have been addressed in the government response. The way the DCU has been designed means that reformed scheme benefits are accrued in a single year, this can impact the annual allowance (AA) and cause additional tax liabilities. The government has stated it will ensure members ‘do not bear the cost of any additional AA charge that is directly caused by the member exercising that choice.’

This situation is far from over, further litigation is likely to come of this and, in fact, already has. Six unions have filed for a judicial review to stop the government imposing the cost of the judgement on members, after legislation that would reduce employee contributions by 2% was scrapped. It is estimated removing discrimination from public sector pensions will add billions per year to scheme liabilities. As most of these public sector schemes are backed by the Treasury, it is easy to see why they are eager to reduce costs, considering the changes required. Cases such as these can take a long time to go through the entire judicial process, so the full effects of the McCloud judgement may not be clear for years to come.

What can we learn from this judgement? ‘Don’t discriminate’ is the obvious answer, but this result shows us that something can be done for the right reasons and cause untold issues for other parties. Where benefits are offered to employees, it would be acceptable to change benefits for all workers, or all new workers, but not for workers within certain categories, such as age or gender. Changes made that only affect specific groups must be designed to ensure they don’t unintentionally discriminate other groups.

This case has captured a lot of attention, primarily because it impacts public sector workers who make up a huge amount of the workforce, currently around 17.5%. It is important to take these lessons and assess if there are any practices within your own organisation that need to be remedied.