Implementation of the second phase of the McCloud remedy to address unlawful age discrimination in public sector schemes commenced on 1 October 2023 with numerous "remediable service" regulations coming into force for each different public pension scheme. We consider the key points of the regulations governing this phase.

Background

In the McCloud ruling, age discrimination was identified within the transitional provisions of the government's public service pension schemes that were put in place in 2015; this enabled workers within 10 years of normal retirement age to continue building benefits in legacy schemes based on final salary, whilst younger workers were moved into career average schemes. Following consultations, which we discussed in our previous blog, measures are being implemented to address this discrimination for the period between 1 April 2015 and 31 March 2022, which are referred to as the McCloud remedy. The UK government passed the Public Service Pensions and Judicial Offices Act 2022 (PSPJOA 2022) with Part 1 serving as the legal framework supporting the McCloud remedy.

The remedy is divided into two stages for implementation. The initial phase, to prevent any further discrimination, termed the "prospective remedy," has now been successfully executed with the closure of legacy final-salary schemes to future accrual and all eligible members becoming members of the 2015 career average schemes from 1 April 2022.

The regulations now seek to address the inequality that has already occurred in the remedy period, termed as the "retrospective remedy," with the introduction of a choice election system. Under this system, impacted members have the option to accumulate benefits for the period between 1 April 2015 to 31 March 2022 (the "remedy period") as if they were in either the legacy final-salary schemes or the 2015 career-average pension schemes. The elections provide two pathways for members; they can make an immediate decision ("immediate choice election") or a deferral until retirement or benefits initiation ("deferred choice election").

Implementation of the retrospective remedy: Summary of key points

The regulations outline the technical elements necessary for the integration of the McCloud remedy across different public sector pension schemes and have retrospective effect for the remedy period. Each public service pension scheme has its own remedial service regulations including schemes for Police, Firefighters, Civil Service, Armed forces, NHS, and Teachers. While the regulations have slight variations tailored to each scheme, they encompass the following common themes.

  • Technical details - The regulations put in place the necessary technical detail to facilitate the implementation of the immediate and deferred choice election system. It clarifies how, until the member decides, their benefits would be considered to accrue in the legacy scheme. This affords flexibility and tailoring to individual circumstances.
  • Member Information - The regulations detail the information that must be provided to members concerning their remediable service.
  • Compensation Protocols - A structured process for compensating affected members and calculating interest on compensation is laid out. This includes calculating the compensation amount and how one can apply for compensation.
  • Administration of Transferred-in Rights - The administration of members' transferred-in rights is addressed to integrate previous pension arrangements into the revised framework, offering clarity and uniformity.
  • Post-Divorce Implementation - Clear guidelines are provided on the application of the remedy concerning pension debit and pension credit members following divorce or dissolution of a civil partnership.
  • Voluntary Contributions - The regulations clarify the treatment of voluntary contributions paid during the remedy period. While the schemes differently regulate these contributions, they all cover a variety of instances including: lump sum and periodical voluntary contributions, deferred and immediate choice members, and benefits treated as under legacy and reform schemes.

Tax position

In addition to the remediable service regulations, two sets of regulations have been introduced to address the tax issues linked to the McCloud remedy: the Public Service Pension Schemes (Rectification of Unlawful Discrimination) Tax (No 1) Regulations and Tax (No 2) Regulations. They aim to rectify tax treatment for affected public service pension scheme members, preserving tax relief on contributions, modifying annual allowances, handling benefits, and addressing compensation. The regulations came into force on 6 April 2023 and 14 September 2023, respectively, with retrospective effect for the remedy period.

Our Insights

The retrospective phase of the McCloud remedy signifies a significant step in addressing age discrimination within public service pension schemes. The regulations address technical intricacies and streamline processes, paving the way for implementation. Overall, the regulations provide further clarity on exactly how these systems operate, which is paramount to enable scheme members to make informed and fair choices.

If you have any queries about anything raised in this blog, please get in touch with a member of the pensions team.

Contributors

Maureen Burns

Senior Associate

Juliet Bayne

Partner

Sarah Keir

Trainee Solicitor