The government’s response to the McCloud case will give many NHS Pension Scheme members some valuable options on retirement.
Many members of the NHS Pension Scheme will be affected by the government’s consultation response, published on 4th February, relating to how it will respond to a landmark court ruling that the transitional protections offered at the time of public sector pension reforms breached discrimination laws. The plan gives members some valuable options on retirement, but it will be important to work through these carefully.
This issue dates from reforms to public sector pension schemes – including the NHS Pension Scheme – implemented by the government in 2015. As part of the changes, scheme members within 10 years of retirement were allowed to remain in the existing, legacy (1995/2008) schemes; there was also a compromise option for those with more than 10 years to go, but within 13 years and five months of retiring. However, these reforms were challenged, and in 2018 the courts ruled the reforms discriminated against younger members of the judicial and firefighters’ pension schemes as the protection was only offered to older members. Since then, the government has been working on proposals to address this ruling, known as the McCloud judgement.
The detail of these plans was announced on 4 February, with the government indicating that it would allow affected members the choice of whether they want to be a member of the legacy (1995/2008 scheme) or the reformed 2015 scheme for the period between 1st April 2015 and 31st March 2022. Affected members are those who were members of the NHS Pension Scheme in service on or before 31 March 2012 and on or after 1 April 2015. That includes those with a qualifying break in their service, as long as this was less than five years.
The government has indicated that this choice (referred to as the deferred choice underpin or DCU) will be made at the point of retirement, as this enables greater certainty on the value of the final pension, rather than having to make assumptions about the future today. Pension calculations are complicated and highly individual, so it is important that affected members assess their position and not assume they are better off in the legacy scheme.
Although the choice of which scheme those affected will ultimately be a member of for the remedy period (1st April 2015 to 31st March 2022) will be made at retirement, the government is obliged to correct the age discrimination at the earliest opportunity. In order to do this, all members impacted by the unlawful age discrimination and who were moved to the 2015 scheme will have their membership during the remedy period changed back to their legacy (1995/2008) scheme. Pension input amounts for each year of the remedy period will need to be recalculated and this has implications for the annual allowance which are discussed below. All scheme members will then move to the reformed 2015 scheme on the 1st April 2022. Under DCU, at the time of retirement members can choose whether to remain with their legacy scheme benefits for the remedy period or take reformed scheme benefits.
The changes require new legislation, with the government committed to implementing the provisions by 1 October 2023. Pension schemes also have the option of putting their own arrangements in place sooner, if this is possible for them.
Nevertheless, some members may retire before the law changes or their scheme takes action, but still have some relevant service between 1 April 2015 and 31 March 2022. In which case, they will be able to make the same choice once the DCU comes into force, and have their benefits backdated to the point at which they began taking them.
By and large, it is good news that NHS Pension Scheme members will have a choice about how the reforms affect them – but there are some things to watch out for. In particular, where pension benefits are changed retrospectively, this could affect their annual allowance charge – a tax on pension benefits above a certain value accrued over the course of a single tax year. Typically, the charge should be reduced, but this will not always be the case.
Anyone whose tax liability increases because of the DCU will need to pay the bill in line with the usual statutory time limits, going back 4 previous tax years. Equally, anyone who has overpaid tax will be compensated for the whole of the remedy period. This could mean a refund of tax if the member paid the annual allowance charge themselves, or an adjustment of their benefits if they asked the NHS Pension Scheme to pay the charge under the “Scheme Pays” facility, as this will be refunded to the scheme. However, the government has stated that at the time of choice, it will ensure members do not bear the cost of any additional annual allowance charge that is directly caused by the member making their choice.
For now, NHS Pension Scheme members do not need to do anything – they should hear from their respective pension scheme in time. They need to continue to adhere to current deadlines including those for scheme pays. For eligible clinicians in England and Wales who wish to utilise the 2019-20 annual allowance compensation scheme, it is essential they submit their scheme pays application in advance of the 31st July 2021 deadline.
Note that public service pension schemes managed by the Northern Ireland Executive are devolved; the executive has also been considering how to implement the McCloud ruling and will respond shortly.
Content correct at time of writing and is intended for general information only and should not be construed as advice.