Graham Crossley, NHS pension specialist, Director, Medifintech
In today’s article, we’ll explore the Public Service Pensions Remedy, commonly known as the McCloud remedy. This remedy addresses significant pension reforms that were introduced following the 2011 Hutton Report, which recommended changes to public sector pensions. These reforms led to legal challenges due to perceived age discrimination, ultimately resulting in the government’s decision to implement measures to correct this. We’ll delve into the background, who is affected, and what is being done to remove the discrimination within the NHS Pension Scheme.
Background
The story begins in 2011 with the Hutton Report, which proposed reforms to public sector pensions. They were deemed to be too expensive in their existing form. The report recommended replacing final salary pensions with career average revalued earnings (CARE) pensions, which included a built-in cost control mechanism.
Interestingly, the Hutton Report specifically mentioned that special protections for older members should not be necessary. However, following extensive lobbying from unions, the reformed pension schemes were introduced with transitional protections. These protections allowed members over a certain age to remain in their legacy pension schemes.
Unsurprisingly, younger members felt aggrieved and believed they were being discriminated against. This led to legal challenges, with judges bringing a case to an employment tribunal known as the McCloud case, and firefighters doing the same under the name Sargeant. The issue escalated through the courts until 15th July 2019, when the government accepted that the discrimination needed to be addressed.
Who Does This Impact?
You are affected if you joined a public service pension scheme on or before 31 March 2012 and meet the following criteria:
- You had pensionable service between 1 April 2015 and the 31 March 2022 (or your retirement date if earlier), or you left service after 31 March 2012 but returned within 5 years
- Your pensionable service was in the legacy scheme (1995 / 2008 Scheme), or your pensionable service was in the reformed scheme (2015 Scheme), but would have been pensionable service in the legacy scheme but for the discrimination
- You did not choose to give up your transitional protection to move to the 2015 Scheme (option to give up protection – OTGUP)
The government has identified that over 1 million members of the NHS pension scheme are impacted, including over 280,000 who have already retired
What Is Being Done to Remove the Discrimination?
The 2015 scheme itself is not discriminatory, it was the transitional protection, the bit that enabled older members to remain in the 1995/2008, that was discriminatory.
The transitional protection has been removed retrospectively, and in its place, members will be given a choice between the legacy scheme and reformed scheme for the benefits they built up during the remedy period, between 1st April 2015 and 31st March 2022.
Removing Transitional Protection
The first part of the remedy was implemented in April 2022. All active members of the NHS pension are now members of the 2015 scheme. All existing membership in the 1995/2008 scheme became deferred, although existing added years / added pension contracts would continue to be honoured.
In addition, the value of pension rights in the 1995/2008 scheme would be preserved for active members of the 2015 scheme by Final Salary Linking for Officer members and Dynamisation for Practitioner members.
- Final salary linking ensures that your pension benefits are calculated based on your salary at the time of retirement, rather than when you stopped accruing service in the 1995/2008 scheme.
- Dynamisation is the process of annually adjusting a GP’s pensionable earnings by CPI +1.5% to reflect changes in inflation and average earnings over time. The Flexibilities Value Earnings Credit (FVEC), which accounts for the value of any pre-practitioner membership in the 1995/2008 scheme, increases by CPI+2%. This helps maintain the value of the pension in real terms, accounting for economic changes that occur between the time the earnings are made and when the pension is eventually calculated.
McCloud Remedy: The Rollback
If you had no transitional protection or tapered protection, any service you accrued in the 2015 Scheme during the remedy period was transferred back to the 1995/2008 Scheme on 1 October 2023. This process, known as rollback, happened automatically.
You should now start to see the impact of the rollback on the Total Reward Statements/Annual Benefit Statements produced since August.
If you have pensionable service in the remedy period that is rolled back, your pension growth over that time will be different, which may affect your pension tax position for one or more of the tax years in the remedy period.
Scheme administrators will be sending out Remediable Pension Savings Statements (RPSS) by October 2024. These will include the previous pension growth and revised pension growth during the remedy period, as well as the previous 5 years and 2022/23.
McCloud Remedy: The Choice
When you take your pension benefits, you will have the choice to keep your remedy period benefits in the legacy scheme or move them to the reformed (2015 scheme).
The benefit of making your choice when you take your benefits is that you will know exactly what you are entitled to. The Remediable Service Statement will show two sets of figures showing the value of their pension benefits to date with their membership for the remedy period in the 1995/2008 Scheme, or in the 2015 Scheme.
For those who have already retired, the scheme administrators hope to contact around 70% of pensioner members by the end of 2024, and the vast majority by April 2025.
Contingent Decisions – An Opportunity to Reinstate Membership
Since the introduction of the 2015 scheme, we have observed many members opting out of the NHS pension, giving up valuable added years contracts, or engaging in a pattern of leaving and rejoining the scheme repeatedly (commonly referred to as “hokey cokey”) in an effort to minimise exposure to annual allowance tax charges.
The government has confirmed that members will have the option to reinstate some or all of their membership for the period between October 2014 and April 2022. Active and deferred members can pay for this reinstatement either as a lump sum or through an instalment plan, while pensioner members may be able to have the contributions deducted from their existing benefits.
The NHS pension is highly complex, and in some cases, reinstating additional membership can actually result in reduced benefits. We have developed specialised analysis to help determine the most cost-effective outcomes.
Any contingent decisions that are made should also be factored into the remedy period annual allowance reassessment.
Reviewing Annual Allowance Tax Charges During the Remedy Period
Your remedy period benefits will be assessed depending on your circumstances.
| Joined 2015 scheme before 1st April 2022 | Joined 2015 scheme on 1st April 2022 |
| Not taken benefits by 1st October 2023
Pension input amount based on legacy scheme benefits during remedy period |
Not taken benefits by 1st October 2023
No change to pension input amount. No reassessment needed. |
| Benefits taken by 1st October 2023
Immediate choice of legacy or reformed. Pension input amount only changes if the legacy scheme is chosen. |
Benefits taken by 1st October 2023
Immediate choice of legacy or reformed. Pension input amount only changes if reformed scheme chosen AND pension input amount is lower than legacy benefits. |
Each tax year within the remedy period will be assessed individually. If your tax liability is reduced for any of the tax years within the remedy period, you will be eligible to claim a refund for the overpaid amount, whether you paid HMRC directly or through scheme pays from the NHS or a private pension.
If your tax liability increases for any of the tax years from 2015/16 to 2018/19, those years are deemed out-of-scope, so no additional tax charge will be due.
If your tax liability increases for 2019/20 or later, the additional tax charge will be due. You can settle this directly or through scheme pays. Additionally, the 2019/20 Annual Allowance Compensation Scheme for eligible members in England and Wales should also be available.
Using HMRC Digital Service to Process Changes
HMRC is introducing a new digital service that will enable members who have new annual allowance charges, or changes to annual allowance charges as a result of rollback, to:
- reassess any previous annual allowance charges during the remedy period tax years
- make an application for a refund of any previously overpaid annual allowance charges for tax years 2019/20, 2020/21 and 2021/22
- make an application to claim compensation for any previously overpaid annual allowance charges for tax years 2015/16 to 2018/19
- pay any underpaid annual allowance charges for tax years 2019/20, 2020/21 and 2021/22
- pay an annual allowance charge for 2022/23
The digital service will also apply to other tax charges such as lifetime allowance charges and unauthorised payments charges.
The service is due to be relaunched in September 2024
Don’t Miss the Deadline
The deadline to complete your annual allowance reassessment will depend on your circumstances:
- 31st January 2025 – If member had not started to take a pension by 1st October 2023
- 31st January 2027 – If member had started to take a pension by 1st October 2023
We expect that there will be some members, especially some GPs, that do not receive their RPSS by October 2024. HMRC will allow members to submit their reassessment within 3 months of receipt of the RPSS.
We have evaluated and projected the impact of the rollback for many members, and generally, we found that members are likely to receive refunds of thousands of pounds. Therefore, it’s crucial to reassess your annual allowance liability for the remedy period before the deadline.
NHS Cost Claim-back Scheme
The NHS Cost Claim-back scheme is designed to address losses that are not automatically corrected through the immediate or deferred choice between legacy and reformed pension schemes. This scheme allows members to apply for reimbursement of direct financial losses or tax losses incurred due to the remedy. While the scope of claims is broad, the NHSBSA has established specific caps within the scheme rules:
- Claims for accountancy services used to complete an application via the HMRC Digital Service are limited to £1,000 including VAT per piece of advice.
- Claims for independent financial advisor services to assist in making decisions about pension benefits for the remedy period are capped at £500 including VAT per piece of advice.
You can apply up to 12 months after you get your RPSS, or you receive your first Remedial Service Statement
Summary
In summary, the McCloud remedy addresses the age-related discrimination identified in public sector pension schemes, including the NHS Pension Scheme. The remedy involves rolling back affected members’ service to their legacy schemes and providing a choice at retirement between legacy and reformed scheme benefits for the remedy period. This process is complex and can impact both your pension benefits and tax liabilities.
To navigate these changes, it’s essential to reassess your annual allowance liability, particularly before the HMRC deadlines. If you’ve incurred costs for professional advice due to the remedy, you may be eligible to claim these back through the NHS Cost Claim-back Scheme.
Given the intricacies of the NHS pension system, seeking expert guidance can help ensure you make the most cost-effective decisions for your retirement.
