Local Government Pension Scheme: Scheme Advisory Board issues guidance on the McCloud judgment and asks GAD to advise on cost

HM Treasury's public service pension employer cost cap and the LGPS Scheme Advisory Board (SAB) cost management process both remain paused (as explained in our February 2019 insight). This is due to the ongoing uncertainty surrounding the McCloud case, which depends on whether the government successfully appeals the Court of Appeal's decision in December 2018.

SAB has issued guidance on potential outcomes at scheme level and proposals for approaching the 2019 valuation process and has asked the Government Actuary's Department (GAD) to estimate an overall scheme cost of the McCloud judgment including a 'worst case' scenario.

Possible outcomes

The impact upon schemes will depend on the final outcome of the McCloud judgment and the resulting cost of addressing any remedy. According to SAB, the following outcomes are possible:

1. If the cost of implementing the McCloud remedy is greater than the cost of the benefit improvements which were proposed by the cost cap, it will not be necessary to implement those benefit changes.
2. If the McCloud judgment is reversed, the cost cap changes will need to be reviewed and the impact will need to be backdated to 1 April 2019.
3. If the McCloud remedy costs less than the cost cap, further changes may be required and will need to be backdated to 1 April 2019.

SAB guidance

SAB has advised adopting the following suggested approaches to the 2019 valuation:

• If the cost cap remains paused and the McCloud outcome is not finalised, meaning there is no formal notification issued by the Ministry for Housing, Communities and Local Government to the administering authorities by 31 August 2019, the approach to valuation should be as set out in the current regulations.
• Administering authorities, in setting employer contributions for 2020, should consider with their actuary how to approach the risk and potential costs.
• Administering authorities should re-visit the statutory guidance or regulation provisions available once the outcome of the cost cap and McCloud judgment have been clarified. SAB has referred authorities to proposals for interim valuations and revisiting employer contributions in the consultation: 'Local Government Pension Scheme: Changes to the Local Valuation Cycle and the Management of Employer Risk' published 8 May 2019.
• Authorities should discuss the approach to regulation 64 LGPS employer exit payments and credits with their actuaries, taking account of regulatory requirements and their fund's individual funding strategy statement. For example, it may be appropriate to be prudent with calculations to ensure the fund is not adversely affected by this process. SAB also refers authorities to the proposed changes to exit credits in the consultation: 'Local Government Pension Scheme: Changes to the Local Valuation Cycle and the Management of Employer Risk' published 8 May 2019.

Finally, SAB has commissioned GAD to estimate an overall scheme cost of the McCloud judgment and a 'worst case' scenario following McCloud, based on a range of pay assumptions. This will be published on SAB's website in due course.