Govt to proceed with deferred choice approach following McCloud ruling

The government has confirmed that it intends to proceed with the deferred choice underpin (DCU) approach when providing members with their options following the McCloud judgment, although flexibilities will be introduced to support scheme administrators.

The government’s response to the McCloud consultation explained that this will mean that members will make their decision between legacy and reformed scheme benefits shortly before benefits are paid from the scheme.

In the meantime, members will be deemed to have accrued benefits in their legacy schemes, rather than reformed schemes, for the remedy period, between 1 April 2015 and 31 March 2022, until they make that choice.

Those who have already retired or received a pension award, meanwhile, will be offered a choice “as soon as practicable” after necessary legislative and process changes can be made, and the position they choose will be applied retrospectively back to the date the award was made.

It stated: “There will be no entitlement to have the benefits of one scheme in some respects, but of the other scheme in other respects. Nor will there be any provision for a 'tapered' system under which some members might be entitled or required to treat part of that period as service in one scheme, and part of it as service in another.

“Maintaining such an age-based system of tapered protection would perpetuate or even extend the discrimination identified by the courts.”

The plans follow a 'landmark' court ruling, which found that changes made to judges and firefighter’s pensions were discriminatory on the grounds of age, and applied to all public sector pension schemes.

The government argued that by deferring the choice most members will have “significantly greater certainty” over their benefit entitlements when making their decision, highlighting this as “by some margin” the most important consideration.

It also acknowledged however, that making a choice at the point of payment means that the majority of members will not confirm the benefits they will receive until they take them, with a number of respondents raising this uncertainty as a concern.

Considering this, the government confirmed that it will require schemes to provide details annually of the accrued benefits available to members in relation to relevant service for both the legacy and reformed scheme, with the aim of providing members with visibility over their expected benefit entitlements for the remedy period in advance of their decision.

The government also confirmed that it will bring forward new primarily pension legislation “when parliamentary time allows”, in order to ensure that the discriminatory features relating to the remedy period and the transition to the reformed schemes are removed from the pension scheme rules with effect from 1 April 2022.

The government stated that by legislating in this way, it intends to avoid any uncertainty or other problems which might otherwise occur from relying upon whatever automatic effect the Equality Act 2010 may have, which it clarified could not be used to implement the preferred DCU approach in any case.

In addition to this, it confirmed that the detail of any necessary amendments required to scheme regulations, in order to implement the policies, will, as appropriate, be the subject of further consultation on a scheme by scheme basis.

The government added that it will be pursuing an alternative timetable for the delivery of these changes, which will give schemes and administrators flexibility in light of capacity concerns, with schemes required to calculate benefit accrual over the period from 2015 to 2022 on the basis of two benefit designs rather than one.

This will be alongside the “considerable work” required to move many members of the reformed scheme back to their legacy scheme for the remedy period, as well as resolving cases of members who have retired or died since April 2015.

As such, it confirmed that primary legislation will state that retrospective changes must be introduced by 1 October 2023, but will allow schemes that can begin implementation
sooner to specify an earlier date for this change in their regulations

“The government believes this is a fair way to ensure that the discrimination is ended as soon as possible, while giving schemes and administrators flexibility to build the systems they need to ensure the DCU is delivered effectively,” It stated.

Commenting on the plans, LCP partner, Steve Webb, has warned that a DCU approach could represent “decades of complexity” for public servants, who will face uncertainty over what rules will apply to their pension until they retire.

He stated: “It is understandable that the treasury would opt for a ‘deferred choice’ where members can look back and see which scheme would have been better for them.

“But 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”.

In addition to this, he also warned that, for some workers, there will be complex tax implications to be resolved if they end up switching schemes at retirement

This was echoed by Quilter NHS expert, Graham Crossley, who added: “The government has made a sensible call to allow a member to decide at retirement which pension scheme is used for their membership during the remedy period.

"However, the problem is far from over and scheme members still have reams of complexity to deal with when coming to a decision.

“Initially all members will get put back in their legacy pension for the remedy period, so there will be many pension members that will have to recalculate their annual allowance liability going back to 2015.

"If the annual allowance charge is reduced retrospectively then the member will be able to get annual allowance compensation.

"In our experience this could impact a substantial population, including thousands of doctors. And the sums are substantial. Already we have seen doctors get thousands of pounds back.

"However, this isn’t a straight forward journey and it is likely that many will need professional advice to get this resolved accurately.

“It is unfortunate the government to do not appreciate the financial confusion they are putting on members. Expert help is vital for impacted members and the government really should be the ones funding it."

In response to some of the tax issues raised during the consultation, the government has confirmed that if a member faces an increased annual allowance charge as a result of choosing reformed scheme benefits when they take their benefits, it will ensure they do not bear the cost of any additional annual allowance charge that is directly caused by the member exercising that choice.

Furthermore, it has decided that individuals will receive a payment to cover the value of their contributions, where they were owed a return of overpaid contributions, but with an amount deducted to reflect underpaid tax, vying from the original consultation proposals.

It also acknowledged the concerns raised around the complexity of correcting members’ tax positions historically, stating that where possible, it will take “proportionate steps” to minimise the the administrative burden on members, warning however that it will not be possible to completely remove this burden in all cases.

“The government acknowledges the need to provide clear and accurate communications and information to members going through this process,” it stated.

“However, the necessary tax corrections following the implementation of the DCU will still place an administrative burden on some individuals, particularly those affected by the annual allowance."

In relation to issues around future pension provision, the government has also confirmed that it “remains committed” to providing generous pension arrangements for public service workers, clarifying that this must be sustainable and affordable”.

In light of this, it emphasised that the reforms “created a fairer system” and reflected the need to control the “significant costs” for public service pension scheme benefits, which were £44.3bn for Great Britain in 2019-20, and ensure that pension provision for public service workers remains sustainable.

As such, it said that all public servants who continue in service form 1 April 2022 onwards will do so as members of their respective reformed scheme, emphasising that the schemes themselves are not discriminatory.

“Legacy schemes will be closed in relation to service after 31 March 2022, closing the remedy period, during which members in scope have a choice of benefits,” it confirmed.

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