The McCloud Judgment – Public Sector Age Discrimination

From 1 October 2023, the public sector pension schemes started to implement the measures for rectifying the unlawful age discrimination which occurred upon the changes to the public sector pension schemes in 2014/15 (including NHS, Teachers, Civil Service, Judicial, Police, Firefighters, Armed Forces, Judicial and the Local Government Pension Scheme (LGPS)) following the McCloud judgment in the Court of Appeal in 2018. 

Broadly, for the unfunded schemes (all but LGPS), younger members were automatically moved to the “reformed” (typically Career Averaged Revalued Earnings or CARE) arrangements on 1 April 2015.  However, members who were closer to retirement (typically within ten years of Normal Retirement Age at an assessment date of 1 April 2012) remained in the old “legacy” scheme (typically related to final salary).  Transitional arrangements applied for those in between, with tapered moving dates of between 2015 and 2022.  From 1 April 2022 any remaining members of the legacy schemes moved to the reformed scheme for future pension accrual. 

All individuals who were members of (or eligible to join) a legacy scheme at the 2012 assessment date with service after 31 March 2015, will be given a choice of legacy or reformed scheme benefits for benefits accrued between 1 April 2015 and 31 March 2022, provided pensionable service is treated as continuous.  Note that legacy benefits are not necessarily greater than reformed benefits, so those who remained in the legacy schemes on 1 April 2015 may find that benefits in the reformed schemes are higher.  The position changes from individual to individual and is affected by various factors e.g. salary progression, retirement age, retirement on ill-health grounds, tax-free lump sum taken, contribution refunds or shortfalls. 
Affected members who are already in receipt of benefits will be provided with an “immediate choice underpin” (within the next 15 months).  Other affected members are to be provided with a “deferred choice underpin”, which means that they do not need to decide between legacy and reformed benefits until retirement occurs.  The member will then be given a choice as to which set of rules is to apply for the 2015–2022 period.  This is referred to as the “McCloud remedy”. 

CEs calculated for divorce purposes are expected to take account of this underpin from October 2023 onwards.  

The legislation is complex and somewhat vague, allowing the schemes to determine how to implement the detail.  However, it appears that benefits built up from 1 April 2015 to 31 March 2022 have been transferred to the legacy scheme on 1 October 2023.  For CE statements the 2015-2022 accrued benefits can be in either legacy or reformed benefit format (so that the legacy pension scheme provides a combination of final salary and CARE benefits).  However, from statements we have seen so far, it generally requires a good understanding of the benefits to be able to work out how the CE has been calculated (and therefore the impact of McCloud at the CE date).

For pension sharing, the regulations appear to state that pension credit ex-spouse members will automatically be compensated by applying the pension share to the higher CE of legacy and reformed benefits accrued in the 2015–2022 remedy period. 

Crucially, it appears that the way in which the public sector scheme implements a pension share depends upon whether the latest CE prior to the order being implemented was dated before or after 1 October 2023.  We understand broadly:  

  1. if the latest CE was calculated before 1 October 2023, then the CEs are calculated ignoring the McCloud remedy, with any pension credit transfer being based on these CEs. Note that this is expected to apply even if the Transfer Day, on which the pension sharing order takes effect, is on or after 1 October 2023. 
    At some point after 1 October 2023, the scheme will write to the ex-spouse and advise that that the credit transfer to them will be reassessed, with the CE being recalculated to provide the higher of legacy and reformed CEs for the period 1 April 2015 to 31 March 2022. The recalculated CE and consequent pension credit will be compared to the original pension credit and adjusted accordingly. Please note that we believe that it is technically possible (albeit unlikely) that the pension credit could fall.  
  1. if the latest CE was calculated on or after 1 October 2023, sharing will be based on the member’s benefits accrued between 1 April 2015 and 31 March 2022 being in the legacy scheme.  
    For pension sharing the CE will be calculated to provide the higher of legacy and reformed CEs for the period 1 April 2015 to 31 March 2022. As the pension credit will reflect the remedy benefits, there will be no further reassessment required.  

Potentially significantly different pension sharing outcomes can arise depending on whether the latest CE was issued before or after 1 October 2023.  Instructing solicitors and divorcing parties should take extra care when arranging for pension sharing orders on pension schemes that may be affected by McCloud.  The request for a new CE, which may have been intended for the purposes of updating disclosures or for other purposes, could dramatically affect the final outcomes.  Written confirmations and undertakings may be appropriate to safeguard against this.  Instructing solicitors/parties should check with the scheme the date of the latest CE to ensure that pension sharing is implemented consistently with the parties’/court’s intentions. 

Details are currently becoming clearer as more information becomes available, including new CEs and benefit statements.  The actual treatment of the McCloud remedy in practice may differ from that set out above (noting that some of the public sector pension schemes, such as LGPS and Judicial Pensions implemented the pension changes differently).  Instructing solicitors and divorcing parties should exercise caution before acting upon the broad comments set out in these notes and should always take advice, given the complexity and potential to change. 

December 2023