Financial expert Paul Forder reviews the background to the age discrimination McCloud case, what changed on 1 April, and what further change lies ahead
On 1 April, 2022, the first steps in the government’s multi-stage process to remedy age discrimination in public sector pension schemes (known as the ‘McCloud’ case) were completed.
For the NHS Pension Scheme (NHSPS), members affected by this discrimination are those who were in service on or before 31 March 2012 and were a member of the scheme on or after 1 April 2015 or had a break in service after 31 March 2012 but returned within five years.
Affected scheme members will need to be aware of what these changes means for their pensions, as well as what future changes could still be to come.
Here, we review the background to the age discrimination ‘McCloud’ case, what changed on 1 April , and what further change lies ahead.
What is the McCloud remedy?
In April 2015, public sector pension schemes were reformed, with most members moved into new career average arrangements. Following consultations with member representatives, ‘transitional protections’ were put in place to protect those close to retirement.
For the NHS pension scheme, these protections meant that members within 10 years of retirement on March 31 2012 would not move from ‘legacy schemes’ – the ‘95 and ‘08 NHSPS sections – to the ‘reformed’ scheme. It also meant that those between 10 and 13½ years from retirement would move to the reformed scheme, but at a later date determined by age on 31 March 2012.
In December 2018, the Court of Appeal found that these transitional protections unlawfully discriminated against younger members of the judicial and firefighters’ schemes. In July 2019, the government accepted that the judgment applied to all the main public service pension schemes, including the NHSPS, and launched a consultation in 2020 with a proposal to remove this discrimination from all public sector pension schemes.
The remedy it has settled on has two main stages.
The first stage was to:
- for those affected, move all 2015 service from 1 April 2015 to 31 March 2022 (known as the ‘remedy period’) back to their legacy scheme, which is either the ‘95 or ‘08 section; and
- move all active members still contributing to the scheme over to the ‘new’ reformed pension from April 1 2022 – a measure designed to ensure equal treatment for all in future.
The second stage will be to give affected members the option to choose which pension scheme they receive benefits from (the legacy scheme or the reformed 2015 scheme) for the ‘remedy period’. These individuals will be asked to make their choice when they access their benefits.
This approach is known as the ‘Deferred Choice Underpin’ (DCU). Affected members are those who were in service on or before 31 March 2012 and were a member of the scheme on or after 1 April 2015 or had a break in service after 31 March 2012 but returned within five years.
The government has given public sector schemes until 1 October 2023 to put the above changes in place and to develop their administration systems in place to allow members to make their choice. Members will not be able to make their choice until this is done. If they have already retired before October 2023, they will still be offered the choice, and any change in benefits will be backdated.
April 1 – what’s happened, and what does it mean for different members?
The first stage is what’s happening now.
As of April 1 2022, all members of the NHS Pension Scheme affected by McCloud who have accrued benefits in the 2015 scheme between 1 April 2015 to 31 March 2022, will have their service moved back to their legacy scheme – either the ‘95 or ‘08 section.
All ongoing benefits are now being accrued in the reformed pension scheme introduced in 2015.
Crucially, any pension a member has built up in the ‘95 and ‘08 sections will not be lost.
Many GPs and practice managers will already have first-hand experience with the 2015 scheme, but may be wondering again what the difference between it and the ‘95 and ‘08 sections are.
The 2015 scheme is – in practice – unlikely to feel hugely unfamiliar for GPs when compared with previous sections. While the ‘95 and ‘08 sections operated on a ‘final salary’ basis for other roles in the NHSPS, for GP practitioners, they were ‘career average’ schemes, operating in a similar way to how the 2015 scheme does now5 .
However, there are differences between the three parts of the NHS Pension Scheme – the ‘95 section, the ‘08 section and the 2015 scheme – that will be helpful for GPs to keep in mind for understanding and assessing the growth of their pension pot, and when it comes to their retirement plans.
One area is in how pension pots are ‘accrued’.
For ‘95 section members, each year that a GP belongs to the NHSPS, their earnings are added to a pot, the total of which is revalued annually to factor in inflation. The resulting figure is known as their ‘uprated earnings’. They will receive an annual pension based on 1.4% of their total uprated earnings, plus an automatic lump sum of three times pension. In the ‘08 section, the pension is based on 1.87% of a GP’s uprated earnings, but with no automatic lump sum.
Meanwhile, those in the 2015 scheme 1/54th of their pensionable pay is added to a pot each year. Like the previous schemes, this amount is revalued each year in line with inflation. The pot will then become the pension when the member takes benefits6.
The schemes also have different mechanisms for lump sums, which may be part of a GP’s retirement income plans.
With the ‘95 section, a tax-free lump sum is automatically paid on retirement – normally three times a GP’s pension. If individuals have membership on or after April 1 2008, then they will also have the option of receiving a larger retirement lump sum in exchange for a smaller annual pension. If they choose to do this, then they will receive £12 of additional lump sum for every £1 of pension exchanged.
A lump sum is not automatically available in the ’08 section or the 2015 scheme. However, GPs to have the option of receiving a lump sum by exchanging part of their pension – again receiving £12 of lump sum in retirement for every £1 exchanged. The maximum value of this is calculated using a formula specified by HMRC7.
Perhaps the biggest difference between the ‘98 and ‘08 sections and the 2015 scheme is that the latter pushes back a GP’s ‘normal pension age’ (NPA) – the age at which they can take their full pension benefits, with no reductions – to the State Pension age. That’s currently 66 years old for both men and women and it will start to increase from 2026. By comparison, the NPA for the ‘95 section is 60, and 65 for the ‘08 section8.
From a practical perspective, this increases the potential income ‘gap’ for any GP planning to retire before their NPA. GPs can claim benefits from different schemes at different times, and if they accrue benefits in the 2015 scheme, they will need to wait for longer to access these, penalty-free, than they would for benefits accrued in the ‘95 or ‘08 section.
This could be an important factor for GPs to consider – especially considering NHS data shows that, as of 2019, the average age of a GP in the ‘95 NHSPS section taking early retirement was 57. Bridging the ‘gap’ will need to be accounted for within their retirement plans.
Practice managers and non-GP staff operated under ‘officer status’ in the NHSPS prior to 2015 – the same way that hospital doctors and staff worked.
Here, benefits were accrued on a final salary scheme basis, with 1/80th of their final salary being paid for each year of service in the 1995 NHSPS and 1/60th in the 2008 scheme.
The lump sum calculation was also based on three times the pension payable, just like the GP 1995 scheme.
This meant that, for practice managers and non-GP staff, the 2015 scheme was a material change in how the benefits are calculated.
They will therefore need to look closely at the Deferred Choice Underpin option when they come to retirement to ensure they have opted for the most beneficial scheme for the seven-year remedy period.
Whilst Annual Allowance and Lifetime Allowance problems may be less relevant to practice managers and non-GP staff, different accrual rates, normal retirement ages and lump sum calculations remain critical considerations.
What do I need to do now?
For the change that happened on April 1, the key point to remember is that everyone has been moved automatically to the 2015 pension scheme, and that pensions built up in the ‘95 and ‘08 sections of the NHSPS will not be lost.
For members affected by the McCloud case, there will be a future choice to make regarding the Deferred Choice Underpin.
That choice doesn’t need to be made now. But it will pay for GPs and practice managers to be prepared.
Paul Forder is regional manager at Wesleyan, the specialist financial services mutual for GPs