Part 9: The McCloud Judgement and what it means for NHS Pension Scheme members

In 2015, the government reformed public service pensions, including the NHS Pension Scheme. These reforms generated significant controversy after a Court of Appeal ruling in 2018 (sometimes referred to as the McCloud Judgement) found them to be discriminatory to younger scheme members.

Background

For most members of the NHS Pension Scheme, the reforms meant a compulsory move to the 2015 section of the scheme. Comparisons between the 2015 section and the 1995 and 2008 sections of the NHS Pension Scheme are broadly:

1. The 2015 section has a later normal age of retirement, although the growth (accrual rate) is slightly greater. This can result in higher pension growth (also referred to as pension input), which might mean the member exceeds the annual allowance threshold. This could trigger a tax charge.
2. Unlike the 1995 section, there is no automatic lump sum, although a member can give up a proportion of their annual pension to take a lump sum.
3. The 2015 section is a “new” NHS pension scheme, as opposed to the 2008 section which was a variation of the 1995 section. This means that members who moved to the 2015 section may have lost a protection against the lifetime allowance tax charge.
4. For officer members (usually non-GPs or officer roles), the 2015 section benefits are calculated on career revalued earnings rather than final salary.

The introduction of the 2015 section only changed how members built up benefits after 1 April 2015. The pension benefits in their legacy (1995 and 2008) sections were not moved across and remained accessible in line with those legacy scheme rules.

Protection was given to those within ten years of retirement (set at April 2012), who were either allowed to remain in their legacy scheme or moved across at a later date to the 2015 section. It was this element of the reforms that was judged to be discriminatory to younger scheme members.

The McCloud Remedy

The government’s response, known as the McCloud Remedy, has been to move all NHS Pension Scheme members to the 2015 section from 1 April 2022 and offer a choice in respect of pension benefits during a remedy period of seven years (2015 -2022), as follows:

1. Receive those seven-year pension benefits in their legacy 1995 or 2008 sections, or
2. Receive those seven-year pension benefits in the 2015 section (*see deferred choice underpin below)

Option 2 will be offered at retirement.

In the meantime, the member’s pension benefits will be recalculated as though the 2015 section did not exist until April 2022. This will give members another seven years of benefits accruing under their old section rather than in the 2015 section. The government has given public service pensions until October 2024 to apply this remedy.

*Deferred choice underpin

For scheme members retiring after October 2023, a deferred choice underpin means they will be offered the choice at retirement of receiving those seven years of pension benefits in their legacy sections or under the 2015 section.

Those members who have already retired will be drawing their NHS pensions, assuming they moved across to the 2015 section, in 2015. They will be contacted by NHS Pensions with respect to the deferred choice underpin and asked to make their choice which will be applied retrospectively.

What needs to happen now?

No action is required. Members of the NHS Pension Scheme do not need to do anything for the McCloud Remedy to apply. It will be automatic, as though they never moved to the 2015 section.

However, due to administrative delays, pension benefit statements are still showing pension benefits in both the 1995 or 2008 sections and the 2015 section. Consequently, any pension savings tax charges or pensions being drawn at retirement are calculated on this basis.

Resolving potential annual allowance pension tax charges

Up until 31 March 2022, any annual allowance pension tax charges have been worked out as though individuals moved to the 2015 section. These will be reworked as part of the McCloud Remedy. If members have underpaid the pension tax charge as a result of the remedy, then they will need to settle the additional tax to HMRC or amend/put in place a scheme pay arrangement. Where the pension tax charge has been overpaid, a refund can be arranged, or an amendment made to the scheme pay election.

Those members who have suffered annual allowance pension tax charges since 2015, or who have recently received the ‘brown envelope’ with their numbers for 2021/22, may wish to contact their specialist medical accountant or financial adviser given that the numbers are likely to be revised once the McCloud Remedy is applied.

Resolving potential lifetime allowance tax charges

Anyone drawing their pension benefits currently will have their pensions worked out without the McCloud Remedy and so enhanced lifetime allowance protections will not have been considered since they will have been deemed to be lost. In addition to pension benefits being revised, any lost lifetime allowance protections will be reinstated.

If in doubt, talk to an expert

These changes affect all members of the NHS Pension Scheme – both GPs and their employees. As mentioned above, the McCloud Remedy will be applied by NHS Pensions in due course and scheme members do not need to do anything for this to happen. It is likely that NHS Pensions will first contact scheme members who have already started drawing their pensions.

Those considering, or who have recently started, drawing their pension should contact a specialist medical accountant or independent financial adviser to gain an understanding of how the remedy could apply to them and affect the decisions they are now making.

Catch up with parts one to eight here.