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NHS pension scheme: what the McCloud judgement means for members

The Government has agreed that all public sector pension schemes will need to be reformed to remove any form of age discrimination. The result is likely to provide more options for members at retirement, albeit with a large dose of uncertainty in the coming years

Following on from the Court of Appeal ruling in two landmark Employment Tribunals on the judges' (McCloud) and firefighters' (Sargeant) pension schemes, the Government has now agreed that all public sector pension schemes will need to be reformed to remove any form of age discrimination. The treasury has estimated the cost of putting through these reforms at around £17 billion in total.

For those who are in the know and that have campaigned for these reforms, this is great news. The result is likely to provide more options for members at retirement, albeit with a large dose of uncertainty in the coming years.

How does it work for NHS scheme members?

There are three main parts to the NHS pension scheme with the resultant benefits under each section calculated differently.

Scheme section

Accrual Rate

Calculation basis

NRA*

1995

1/80th

Final salary

60

2008

1/60th

Reckonable pay

65

2015

1/54th

Career average

SPA**

*Normal retirement age (for those without special class status).

**State Pension age.

Generally speaking, an individual is automatically placed in the relevant scheme based on when they started NHS employment and begun paying pension contributions. For example, on the closing of the 1995 section to new members on 1 April 2008, all new employees would have been enrolled into the 2008 section.

The same principle applies with the 2015 section, whereby any new members joining the scheme after 1 April 2015 will automatically join that scheme… Simple enough.

The problem was created by how existing members of the legacy schemes (the 1995/2008 sections) were treated. This is also what led to the relevant employment tribunal and associated government-failed appeal.

Where does age discrimination come into it?

Those members who were in active accrual and 10 years away from their normal retirement age on 1 April 2012 would have remained in their legacy schemes. So anyone who was aged 50+ in the 1995 section or 55+ in the 2008 section remained in situ. Equally, anyone under a certain age (46½/51½ respectively) would have automatically have been moved into the new scheme on its launch on 1 April 2015.

The complicating aspect was what happened to those who were between 10 years and 13½ years from retirement. These individuals were moved into the 2015 section on their own personal ‘transitional date’ as determined by their date of birth. 

All this means that two members of the pension scheme born two years earlier or later could end up with differing pension benefits on the basis of age. Therein lies the discrimination.

What happens now?

Anyone who was an active member prior to 1 April 2012 will be automatically moved back into their legacy scheme, with the Government aiming to implement this by 1 April 2022. The period from 1 April 2015 to 1 April 2022 is to be termed the ‘remedy period’ with all members being moved into the reformed scheme at the close of this period.

This will create a serious headache for members (and/or their accountants/advisers) as it may mean recalculating:

  • Lifetime allowance tax (where benefits taken)
  • Annual allowance tax
  • Benefits already paid (for retired members)
  • Benefit accrual for active and/or retiring members
  • Members who have opted out may be allowed to opt back in
  • Paid ill health or survivor’s pensions

The above is by no means an exclusive list.

As the act of moving back into the legacy scheme may not benefit all members; individuals are to be given a choice between benefits at the point they reach retirement (termed a ‘deferred choice underpin’ in the jargon).

Clearly, it is important to get this decision right, as it can have long-term consequences in respect of the pension income received (possibly for 30 years +) as well as any lump sum payable.

More immediately, it may mean those that have been hit with an annual allowance tax charge can reclaim some of that money back when their benefits are recalculated.

What does it mean for me?

If you are an active member of the scheme it will take some time to get a more concrete answer on what your benefits could be on retirement, with the NHS targeting October 2023 as the date to provide members with clarity on their benefits. This raises the question: if you can’t get answers from the pension’s agency, where can you get these from?

Speak to Tilney

After the last year, many will want greater certainty on their options and what these reforms might mean for their retirement plans. At Tilney, we have NHS experts across the country that are happy to help. Please do get in touch on 020 7189 2400 or book a free initial consultation online. Let's start a conversation.

Get in touch

This article is based on our understanding of current legislation which may change. If you are in doubt as to a course of action you should seek professional advice.

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