McCloud and member choice

It has been a big week for public sector pensions. Hot on the heels of the Government’s decision not to grant high earning NHS members pension freedoms, it announced yesterday how it was going to manage member choice for the 3.5m public sector workers affected by the McCloud judgment.

The Government, (rightly in my opinion), has decided not to make members of public sector defined benefit schemes choose on what benefit basis they want to be paid till the last minute. This will mean members choosing with the certainty of knowing what they are getting rather than relying on actuarial assumptions. The Treasury’s Steve Barclay MP sums up in his forward

The significant majority of responses backed the introduction of a ‘deferred choice
underpin’ (DCU) as the way to remedy the identified discrimination. This approach
will enable eligible members, when they retire with a pension, to choose whether
the legacy or reformed schemes would be better for them for the period between 1
April 2015 to 31 March 2022. Respondents offered strong and convincing
arguments to support this view, which are set out within this consultation response.
It is clear to me that the DCU will provide greater certainty for members and is also
the right approach for schemes and the government.

It avoids the need for members to make assumptions around things such as their
future public service career, and retirement age, which would increase the risk of
making an incorrect decision, particularly for younger members. It also results in a
more manageable administrative challenge for schemes as the overall task will be
spread over decades rather than just a few years.

This consultation response also confirms that the legacy schemes will close on 31
March 2022. Whilst the courts found that the transitional protection arrangements
in introducing the reforms were unlawfully discriminatory, the reforms themselves
are not. From 1 April 2022 therefore, anyone who remains in service will do so as a
member of their respective reformed scheme, meaning everyone is treated in the
same way in this respect.

What were the choices?

Between 16 July and 11 October 2020, the government consulted on two options
(immediate choice or deferred choice underpin) to remedy discrimination that arose
when reformed public service pension schemes were introduced in 2015.

This discrimination arose when transitional protection was offered to some members
– following negotiations with member representatives – alongside the introduction
of the reformed pension schemes in 2015. This was intended to protect and give
certainty to people who were close to retirement.

In December 2018 the Court of Appeal found that transitional protection arrangements, which allowed certain members of the judicial and firefighters pension schemes to remain in their existing schemes when they were closed to other members, gave rise to unlawful discrimination, as transitional protection was only offered to older scheme

In July 2019 the government confirmed that it accepted the Court’s
judgment had implications for the other public service schemes that had similar
transitional arrangements

Put another way, having fought and lost the McCloud judgement, the Government are now making the best of a bad job.

What this says about member choice

The pragmatic approach adopted by the Government is welcome and this diagram shows why

Nobody said it was easy

The arcane nature of defined benefit pension provision with its differing benefit formulae are fascinating to actuaries and other pension experts but utterly baffling to the general public and – importantly – to members.

The Government seems to be learning an important lesson, which is that it is unfair to ask people to make choices on what might happen, and fairer to ask them to choose on the basis of what has happened. In the case of defined benefits at least, what has happened, defines the future.

Wind back to other “times to choose” on pensions and the general public have not been so fortunate. Members of the British Steel Pension Scheme were asked to choose between the certainty of PPF benefits, the uncertainties surrounding a new version of BSPS and a guaranteed Cash Transfer Value where the crystallized value of their pension would be theirs. 7700 of the 35,000 members of the scheme took what the FCA and financial ombudsman are now considering may have been the wrong decision, despite it being the only decision which gave them a certain outcome at the time.

It was unfair to ask people to choose on BSPS for precisely the reasons mentioned above, we cannot make reasoned choices on what may happen in the future , without good information on the probabilities. I know this from horse racing where I have often committed my money to a horse on the basis of gut feeling, only to rue that choice a few minutes later.

Without good information , many of us are easily lead

The responsibility of future choice

It is beholden on those who ask us to make future choices , to make information on those choices available well in advance so that people are not bounced into taking hard decisions in short time-frames. Again the comparison with the BSPS time to choose is relevant. I hope that the unions and employers looking after the interests of the 3.5m people affected by the McCloud judgment will not leave members to take decisions at the last minute but use the time between now and their time to choose constructively.

The same can be said for other groups, the postal workers for instance, who are going to have to take decisions not just on their future pension but on what to do with accrued benefits (whether in an unguaranteed DC pot or as a guaranteed cash sum).

Time helps people understand and the slow osmosis of information can help people take decisions on their pensions in an informed way. It can help them keep the scammers at arms length and can ensure that the value of the right choice is enjoyed for many years to come.

The most important lesson for Government following their decision to allow members to choose when they take their pensions, is the lesson of Port Talbot.  The Government now has the chance to help millions of workers in their employ to understand the choices ahead of them and ensure they take the choices that are right for them.

Lessons on wider pension policy

There was a third significant development in member choice this week as members of defined contribution schemes and owners of non-workplace pensions were offered the choice of investment pathways.

Maybe those in charge of organizing these pathways should recognize that these choices are generally based on assumptions. Ironically, the only choice that offers long-term certainty is the purchase of an annuity – something the Government has promised us we will never have to do in future.

It might be worth remembering the Government’s decision on the implementation of choices following McCloud when it reviews its pathways. People need time to choose and certainty about the impact of choices.




About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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