Proposed McCloud amendments could cost LGPS employers £2.5bn

Proposed amendments to the Local Government Pension Scheme (LGPS) in England and Wales are estimated to cost LGPS employers £2.5bn in the coming decades, according to a report from the Ministry of Housing, Communities & Local Government (MHCLG).

The report, which launches a consultation into amendments of the rules governing ‘transitional protection’ in the LGPS, said this cost estimate was based on an annual future long-term pay growth assumption of CPI +2.2 per cent, an assumption used for the 2016 valuations of public service pension schemes.

The key change listed in the consultation document is removing the condition that required a member to have been within ten years of their normal pension age on 1st April 2012 to be eligible for underpin protection.

The members most likely to benefit from this are active members between the ages of 41 and 55 as at 31st March 2019, according to the MHCLG.

Members who joined the LGPS after 31 March 2012 were not considered to need to be provided with underpin protection as they would have joined the LGPS when either it had already transitioned to the career average structure on 1 April 2014, or when it was well publicised that the LGPS benefits were reforming.

From April 2022, the MHCLG has proposed that the period of underpin protection will cease and all active LGPS members will accrue benefits in the career average scheme, without a continuing final salary underpin.

The consultation follows the McCloud judgment, which ruled that allowing older members of public service pension schemes to remain in final salary pension schemes but moving younger members to new career average schemes changes to public service pension schemes, were unlawful due to age discrimination.

The consultation will last for 12 weeks, ending on 8 October.

Aon senior consultant, Virginia Burke, said: "We expected the changes in the MHCLG’s consultation to be testing and that has proved to be the case. The changes present a significant challenge to administering authorities and to employers, not least of which will be a major data collection exercise to enable the final salary underpin to be calculated.”

Burke commented that administering authorities would "need to critically study the draft regulations in detail and highlight areas where changes may be needed in their response to the consultation” adding that it would be “a mistake to think that this can all be solved by changes to the administration software and it's vital that funds understand the resource implications for their fund”.

She concluded: “As well as changes to ongoing administrative systems, processes and communications, the recalculation of leavers' benefits represents an enormous task, covering retirements, deferred leavers, deaths, transfers, trivial commutations and other leavers.

“It is therefore vital that administering authorities plan how they will deliver all aspects of McCloud and start to engage with employers to obtain data going back to 2014.”

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