New rules have been introduced following a legal dispute over age discrimination and public sector pension scheme reform which came into force on 1 April 2022.
For many members of the NHS Pension Scheme, 1 April 2022 was an important day, when changes to the scheme following a landmark legal ruling on age discrimination came into effect. The McCloud judgement, delivered in 2018, declared reforms to public sector pension schemes, including the NHS, that forced the Government to reconsider its plans – and on 1 April 2022, its response was implemented.
The original reforms proposed the closure of the 1995 and 2008 sections of the NHS Pension Scheme, with most members moved into a reformed version of the 2015 section – but with exemptions and different joining dates for members closer to retirement. However, in the McCloud case, the courts ruled such exemptions and age criteria were unlawful, because they unfairly discriminated against younger members.
Under the updated reform, the 1995/2008 NHS Pension Scheme, now known as the legacy scheme have closed – and all members have moved into a reformed 2015 scheme. This will mean that all members who are in scope of the McCloud remedy have been reverted to their legacy scheme for the remedy period. Those in scope is defined as members of the NHS Pension Scheme who were in service on or before 31st March 2012 and on and after 1st April 2015, including those with a qualifying break of less than 5 years. These members will have the option at retirement of taking benefits earned during the “remedy period” – April 2015 to April 2022 – that are either calculated in line with the 2015 scheme rules, or the rules of the legacy scheme.
This mechanism is known as a “deferred choice underpin” – or DCU for short. But beyond the jargon, the important point is that you will be able to pick whichever calculation method produces the best result. And you won’t have to do it until you reach retirement, so you will have a full picture of what you might be entitled to.
The 2015 section explained
Now that all contributing members have moved into the reformed 2015 NHS Pension Scheme, it is important to understand what this scheme offers. Unlike the 1995/2008 Scheme, which paid pensions based on your final salary at the point of retirement for Officers, the 2015 section works on a career average revalued earnings (CARE) basis. It is still a defined benefit scheme, with your pension guaranteed, but the value of your pension is calculated according to your pensionable pay throughout your career, rather than based on a final year calculation.
In practice, currently your annual pension under this arrangement will be equal to 1/54th of your pensionable earnings for each year or part year that you are a member of the scheme. This will be subject to a revaluation on 1 April each year, with the revaluation rate determined by the Treasury each year you an active member.
Members of the 2015 section can start taking their benefits at 65, or their state pension age, whichever is later without reduction. However, members with benefits in the 1995 and 2008 scheme are still entitled to draw these benefits without reduction at the normal pension ages in those plans – 60 and 65 respectively.
The 2015 scheme does not automatically pay a tax-free lump sum on retirement, but you do have the option of purchasing a lump sum. At the time you apply for your pension, you will be given the option of exchanging some of your income for a lump sum. For each £1 of pension that you give up, you’ll get £12 of lump sum payment.
On additional benefits, the 2015 section will, depending on the circumstances, offer a lump sum on death benefit, adult dependant’s pension and children’s pensions. The way these benefits will be calculated will differ from the methods used in the 1995/2008 scheme but will provide broadly similar benefits.
Nuances and wrinkles
By and large, the new arrangements should work well for NHS Pension Scheme members, ensuring you maintain access to the best benefits calculation method for you – and that you don’t have to make decisions in the dark. However, there are some issues of which to be aware.
For example, members of the NHS Pension Scheme with enhanced protection – protection against historic reductions in the lifetime allowance cap on pension savings – will need to have left the scheme before 31 March 2022 to maintain this status. Otherwise, you will transfer into the 2015 section, which automatically triggers loss of protection.
Many members lost enhanced protection as they joined the 2015 section prior to the reforms, but they should be able to reinstate if they do not join the reformed version of the scheme from 1 April 2022. Importantly, your decision to opt out is effected from the next payroll after the application SD502 is received by your employer not any specific date that you may want to request.
Finally, members who have moved to the 2015 Scheme will retain the final salary link for their legacy scheme; it will therefore be their final salary (as defined by the 1995 or 2008 section) at retirement that is used to calculate their pension, as long as they remain active members and do not have a break of more than 5 years.
Content correct at the time of writing and is intended for general information only and should not be construed as advice.