Tony Williams: McCloud case and implications for the LGPS?
0by Tony Williams, head of pensions risk policy and strategy, Local Pensions Partnership
Current position
When I was asked to write about the McCloud case and the implications for the LGPS, the terms ‘known knowns’ and ‘known unknowns’ immediately sprung to mind.
The case has significant implications, not just for the LGPS but all public sector pension schemes and whether they continue to remain affordable.
What is known?
We know following a statement in the House of Lords, on 15 July 2019, that the government expects to have to amend all public service schemes following the McCloud judgement. This includes the LGPS after leave to appeal further was denied on 27 June 2019.
Room151’s LGPS Asset Allocation Forum
November 7th, 2019, London Stock Exchange
The ‘protections’ introduced in the McCloud case, for members nearing retirement have been deemed to have given rise to unlawful age discrimination as younger workers did not enjoy the same protections.
Initial estimates suggest remedying the discrimination will add around £4bn to liabilities per annum from 2015.
It is now for the Employment Tribunal to determine the remedy and the government will engage with employer and member representatives in the interim.
We know the case is causing huge difficulties in sign off, in relation to IAS accounting reporting and planning for the 2019 triennial valuation.
We also know the full impact needs to be known by 31 August 2019 to be considered in finalising 2019 triennial valuations.
What is unknown at present?
No one can say with any certainty the cost going forward. Estimates based on salary increases range between 0.1% to 3.2% on an accounting basis in relation to active liabilities and close to 1% on overall accounting liabilities.
Amounts will vary for individual employers and it is unclear on the effect on the ongoing liabilities, which will set contribution rates to operate from 1 April 2020 and cessation liabilities. This will almost certainly lead to employers, who are able to, choosing to cease LGPS participation, due to uncertainty on costs both now and in the future.
How further interim actuarial valuations will take place to reset employer contribution rates post 1 April 2020, if the current LGPS consultation on valuations, ending 31 July 2019, needs to be enacted first.
How did we get to this position and what can be learned?
A key question is whether the protections were needed as the career average LGPS scheme is still significantly more generous than typical private sector provision.
The cost cap benefit improvements that were due to be implemented before McCloud, were, in my view, fatally flawed, as they considered only salary increases and mortality assumptions, not all actuarial factors that affect overall liabilities.
We will await resolution of the McCloud case over the coming months, however this will almost certainly lead to calls for a review of benefit structures both within the LGPS and the unfunded schemes to ensure that they remain affordable for taxpayers.
The new LGPS scheme has been in operation for five years since 2014, however it is unlikely to operate for a further five years without another fundamental review taking place.
This review is likely to be led by continuing financial pressures within local government and the need to achieve fairness for taxpayers.
Lastly, when introducing the new LGPS scheme in 2014, no real margins were built into the 2014 scheme when increasing the accrual rate. A margin to allow for further legal challenges or regulatory issues would appear to have been prudent.
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