LGPS pension bill to rise 1% with McCloud case

Initial estimates from some LGPS funds show that the impact of the McCloud case is expected to represent a hike of less than 1 per cent in liabilities.

In 2018, both the Employment Appeal Tribunal and Court of Appeal found that the government discriminated against younger firefighters and judges by protecting older workers from downgrades to defined benefit pension provision. The judgments will force other public sector pension schemes to compensate some younger members for their unfair treatment.

While the impact on LGPS balance sheets looks to be slight, final calculations for the scheme’s valuation are still a long way off, and there are several unanswered questions on how the compensation will be determined, experts warn.

Merseyside sets aside £78m

The Merseyside Pension Fund, for example, has predicted an impact of an additional liability of £78m from the judges’ and firefighters’ discrimination case, which represents 0.6 per cent of their future pension promises.

According to a document from Wirral Borough Council – the administrative authority of the scheme – this figure takes into account the cost of applying a “final salary underpin” (on a member-by-member basis) to those active members who joined the fund after April 1 2012 and who would not otherwise have benefited from the underpin.

Any allowances can only be preliminary adjustments and therefore the actual costs could end up being higher

Kirsty Bartlett, partner at Squire Patton Boggs

The £8.9bn MPF, with more than 138,000 members, is part of the LGPS, and alongside Greater Manchester Pension Fund and West Yorkshire Pension Fund collectively form the Northern Pool.

However, several decisions still need to be made, such as which members would be eligible, or what will be the period of the underpin, among others. These are “likely to have a material impact on the overall cost of the benefit structure and administration requirements,” Wirral Borough Council states.

“Consequently, it is difficult to anticipate the definitive cost of the McCloud case on both future and past service benefits,” it adds.

Public sector changes ruled discriminatory

The court case relates to a dispute started in March 2015, when the DB pension schemes for judges and firefighters were closed, and the members transferred into a replacement scheme.

Transitional provisions were put in place, which allowed older judges and firefighters to remain members of the old schemes, either until retirement or until the end of a period of tapered protection, dependent on their age.

But in a ruling handed out in December, the Court of Appeal says that the government discriminated against the two groups on the grounds of age, race and equal pay in relation to changes to their pensions.

In June, the Supreme Court refused the government’s application to appeal the court case, which marked the end of the legal process.

In July, the government confirmed the ruling will apply to all public sector schemes, with an initial estimate that remedying the discrimination will add about £4bn a year in liabilitiesacross the board.

Impact similar across LGPS funds

Besides the MPF, other LGPS participants have started to consider the implications of the case in their accounts.

According to its latest annual report, the East Riding Pension Fund, part of the Border to Coast Pensions Partnership pool, has estimated a £24m impact of the case, which represents 0.3 per cent of its total liabilities.

The Kent County Council Superannuation Fund, part of the Access pool, has estimated additional costs at £70.5m, or 0.7 per cent of future pension promises.

Despite considering that these numbers are very broad estimates since the final outcome of the case is still unknown, Graeme Muir, partner and head of public sector at Barnett Waddingham, is expecting that the “worst-case scenario” will be an impact of 1 per cent in liabilities.

He explains that it will be more material to other unfunded schemes, since they have different calculations to run.

“When all the new career average schemes were coming in, members within 10 years of retirement got some sort of transitional protection,” Mr Muir says.

“The LGPS did it in one way, while other unfunded schemes did it in a different way, they created new schemes. Everybody that was there in 2012 was protected, it is a case of how well they were protected.”

David Davison, director at Spence & Partners, agrees with the preliminary estimate, but notes that this is just at a scheme level.

He says: “Clearly, it’s worth noting that even if the overall figure for the scheme is 1 per cent, then individual employers may have an impact that is less or greater than this depending upon their individual profile.”

Long way ahead

Kirsty Bartlett, partner at Squire Patton Boggs, warns that it is difficult to comment on the appropriateness of the allowances that individual funds are making while there is still uncertainty about the precise impact of the judgment on the LGPS.

“We don’t yet know exactly how benefits will be changed, or how those changes will interact with the cost-cap mechanism that was recently triggered – and then paused – in response to the McCloud judgment,” she says.

“In those circumstances, any allowances can only be preliminary adjustments and therefore the actual costs could end up being higher.”

In January, Elizabeth Truss, then chief secretary to the Treasury, announced that the government was halting the valuation of public pensions due to the “potentially significant but uncertain impact” of the discrimination court case.

This matter will not have a quick solution, since the government and public pension schemes are still waiting for remedies to be approved by the relevant employment tribunals for the judges’ and firefighters’ cases.

In the LGPS, any benefit changes will need to be made by amendments to the regulations that govern the scheme, Ms Bartlett notes.

She adds: “It’s clear that this is going to take some time to resolve. Any benefit changes are likely to have to be made with retrospective impact, so it’s understandable that some funds are starting to make an allowance for the potential costs now, particularly while they are in the process of agreeing the 2019 valuation.”