The government has announced its response to the McCloud judgment: deferred choice underpin. But what is it and what does it mean for pensions?
What is the McCloud Judgment?
The recent McCloud judgment upheld the age discrimination of reforms to the public sector pension schemes by the Government in 2014 and 2015. The amendments discriminated against younger workers. The decision identified that workers below a certain age were automatically moved to a new pension scheme, but those closer to retirement were able to stay in the old (‘legacy’) arrangements. Specifically, under the judges’ and firefighters’ schemes, the ‘transitional protection’ offered to some members gave rise to unlawful direct age discrimination as the protections favoured the older members of the scheme.
Government reforms
The Government followed this court judgment with the launch of a consultation in order to consider how best to address the discrimination found in the public sector. The two options for consideration were:
An ‘immediate choice’ where millions of teachers, nurses and civil servants would make a choice now as to which scheme, they wanted to be members of, for the period from 2015 to 2022;
A ‘deferred choice underpin’, where members would stay in their ‘legacy’ scheme but could opt at retirement for the alternative scheme if this would produce a larger pension; workers will have to trust that this provision will not have been changed by the time they retire;
Deferred Choice Underpin: what are the concerns?
Recently, the Treasury has acted upon this by publishing proposals that it will be implementing the ‘deferred choice underpin’, however the announcement has been met with concerns. Experts have identified that the reforms will face severe challenges, with the main being the vast scale of reform needed and its feasibility.
With up to three million public sector workers affected by the Government’s initial reform to their pension schemes, the Treasury has estimated the cost of dealing with the issue to be £17bn. AJ Bell’s senior analyst Tom Selby comments:
“The Treasury says those costs will ‘feed into employer contribution rates’, meaning pension costs for public sector employers are almost certainly going to go up, placing a drain on resources at the worst possible time.”
In addition to this, Selby argues that members of these schemes will not know for certain what rules will apply to their pension until they retire. They will receive forecasts of their pension based on their legacy scheme, but their final pension may turn out to be different, if the alternative scheme would have been better.
Selby asserts that, this approach “effectively unravels the preferential treatment given to older workers as part of reforms first announced a decade ago [and found unlawful under the McCloud judgment], bringing to an end, a sorry, expensive and entirely avoidable saga.”
Will Deferred Choice Underpin be complicated to implement?
Another concern highlighted with the deferred choice underpin, is that it will be more complicated to implement, with communications and administrative challenges. Former Pensions Minister, Steve Webb has commented that “between now and retirement this means that members will simply not know what their pension is going to be and will also have to hope that future governments keep this promise. This will make retirement planning even more uncertain. Pension schemes will need to retain the ability to work out pension rights under two different arrangements for decades to come and will have to be able to explain those calculations so that members can check if they are correct. Members will need clear communications about where they stand and support in understanding how their pension has been worked out. There is no doubt that unpicking this mess will lead to decades of complexity and uncertainty for public service pension scheme members.”
Guidance on Deferred Choice Underpin offered by experts
Graham Crossley, an NHS pension expert at Quilter has commented on another unfortunate administrative aspect. “The government [has] acknowledged that some people may have made decisions about their pension based on the information available, including leaving the scheme. Given the legal challenge with [the McCloud judgment], there was a need to think carefully on how to ensure these people are not disadvantaged. The government has decided to allow members to re-join the scheme retrospectively on a case by case basis, if the member could demonstrate that they would have stayed in the scheme had the legacy scheme remained an option for them. This puts substantial pressure on the members to evidence their decisions.”