Increased employer contributions likely following McCloud ruling - Gowling

Public sector employer pension contributions are likely to increase to cover the “expensive” implementation of the McCloud ruling, according to Gowling WLG.

The law firm stated that the increased contributions could lead to a rise in proposals to change pension scheme provision from employers that find participating in the main public sector schemes or Local Government Pension Scheme (LGPS) less attractive.

The McCloud ruling found that changes to public sector schemes in 2015, which meant that older members could stay in the existing and ‘better’ pension scheme while younger members had to transfer to a new scheme, were discriminatory on the grounds of age.

The government published consultations in mid-July 2020 on how it should enact the court decision for public service schemes and the LGPS.

Gowling WLG warned that the communication exercise would be “complex” and further detail will be needed on the respective roles of scheme employers and administrators in communicating members’ choices once the consultations conclude.

“Employers will be concerned to understand the extent to which they need to support staff in making choices and where liability rests if members make poor decisions,” noted the authors of the update, Gowling WLG principal associate, Hannah Beacham, and partner, Paul Carberry.

Beacham and Carberry also noted that the McCloud remedies could give rise to grievances and other disputes, and employers may be concerned about the tax implications of member choice for their staff, especially higher earners or those with long service.

Additionally, private sector contractors who provide outsourced services to the public sector may have legal obligations to participate in public sector schemes or offer comparable pensions under the New Fair Deal.

“Contractors will therefore be concerned to understand the implications of these consultations for their workforce,” added Beacham and Carberry.

The likely increased employer contributions could tempt contractors to seek alternative pension provision and exit public sector schemes where possible, which could trigger financial liabilities that would “need careful management”.

“Both existing and future contracts will need to be reviewed carefully so that the contractor understands who will bear this additional cost,” continued Beacham and Carberry.

“Contractors will also need to understand their role in relation to any member choice exercises. Will they get support from the scheme administrators or will they be expected to facilitate the exercise in any way? And is there potential liability for employers if members later regret their decisions?

“For contractors who operate their own broadly comparable schemes, do they now need to take steps themselves to remove any discrimination issues which arise from having ‘mirrored’ the public sector schemes and if so, are they bound to follow what the public sector schemes are doing?”

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