How to clear those McClouds

Photo by James Hose Jr on Unsplash

The scale and complexity of McCloud demand a focus on governance, administration and project planning, writes Ian Colvin.

When Lord Hutton produced his report on the future of public service pension schemes in 2011, he considered the matter of special protection for those closest to retirement age, before concluding;

…special protections for members over a certain age should not be necessary. Age discrimination legislation also means that it is not possible in practice to provide protection from change for members who are already above a certain age.

Those responsible for the administration of public service schemes must surely wish that his Lordship’s words had been heeded.

When the LGPS moved to a Career Average Revalued Earnings (CARE) benefit structure in 2014 (England and Wales) or 2015 (Scotland), protections were put in place to give employees closest to retirement “the best of both worlds”. Any active LGPS members within 10 years of their normal retirement age on 1 April 2012 were given an underpin protection, meaning that on retirement they would receive the better of the old final salary benefits or the new CARE benefits.

Other public service pension schemes took a different approach to protecting members, but all of them limited protection to those closest to retirement. The principle of this approach was soon challenged in the judicial and firefighters’ pension schemes (the “McCloud” and “Sargeant” cases, respectively) and eventually ruled as age discriminatory in the Court of Appeal. The decision had immediate application for the other public service schemes, including the LGPS, which must all now address the age discrimination inherent in their old scheme protections.

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The LGPS approach

In its July consultation, MHCLG set out how it proposes to address this issue for the LGPS in England & Wales, and SPPA proposed a similar remedy to the Scottish LGPS. In essence by extending the underpin to all members who were active in the LGPS on 1 April 2012 and not just those closest to retiring at that point.

To achieve this, it will be necessary not just to apply the underpin to the future service of current active members until 31 March 2022, but also to revisit the records of members who have already retired, left or even died; administrators will need to determine whether the underpin should retrospectively be applied and arrange for necessary backdated payments to be made.

A project of this scale will require appropriate resourcing and oversight. It is crucial that pension committees recognise that administration teams, which are already stretched as a result of data challenges, GMP reconciliation and numerous regulatory changes, will need to be properly resourced to deliver McCloud. Local pension boards, with their focus on administration and governance, will also want to be satisfied that sufficient planning, preparation and resource is in place.

McCloud should be an item on every LGPS fund’s risk register and be a regular item on both committee and pension board agendas.

Administration

Our analysis shows that calculations will be required to check the records of around 1.2 million members in LGPS funds across the UK, equivalent to roughly a quarter of all members. Administration teams face the challenge of maintaining ongoing records, assessing both benefit structures at retirement and revisiting cases that need retrospective assessment.

It is important to note that, even if relatively few (say 5%) of members’ benefits will need to be amended, administrators still need to check 100% of the relevant members’ records to establish which ones are included in the 5%.

There will be a major communications challenge as funds explain the underpin system to affected members. There is also a category of members who will be required to aggregate existing pension records if they wish to benefit from the underpin protection. Identifying these members and explaining the impact of their options will be a significant exercise.

The role of employers should also not be underestimated. Funds will likely require new data from their employers to cover the period of the new underpin. Where employers no longer exist or have changed payroll since 2014, this will be challenging.

Project planning

The scale and complexity of McCloud make good planning essential. Whether managing the project internally or bringing in outside resource, funds will need to have in place a robust plan. Right now funds should be identifying stakeholders, allocating roles and responsibilities and thinking about resourcing. Any plan will also need to identify risks, actions, issues and dependencies as well as keeping an eye on the budget and timescales.

In the ever-lengthening list of challenges facing LGPS funds it may be tempting to place McCloud on the backburner in order to deal with more immediate issues. However, a project of this scale needs careful planning and funds should already be analysing their data, identifying the necessary resource and putting in place a robust plan for delivery. Only by focusing on governance, administration and project planning can McCloud be a success.

Ian Colvin is head of LGPS benefits consultancy at Hymans Robertson.

Photo by James Hose Jr on Unsplash.

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