Public Service Pensions Update | May 2023

This month, we look at developments in areas including the cost control mechanism, the Local Government Pension Scheme Advisory Board cost management process, cyber security and the Retained EU Law Bill. We also look at some recent Pensions Ombudsman decisions.

If you would like to discuss any of the items in this newsletter, please contact one of the experts listed at the end.

McCloud remedy | Consultation response (judicial pensions)

In our January 2023 newsletter, we reported that the Ministry of Justice was consulting on draft regulations to deliver the McCloud remedy for judges (a formal options exercise offering judges a choice between legacy scheme or 2015 scheme membership for the period 1 April 2015 to 31 March 2022). The draft regulations also make a couple of changes which are not directly related to the McCloud remedy.

The government has now published its consultation response. The response confirms that the government has "amended the draft regulations based on feedback to this consultation and will proceed with laying the regulations in Parliament. Once these regulations have been scrutinised by Parliament and are in force, the MoJ will begin the options exercise. Further communications about this will be published and sent to those judges in scope of the options exercise in due course."

Cost control mechanism | Policy paper on 'reformed scheme only' design

In October 2021, the government confirmed that it would make three changes to the cost control mechanism (CCM) in time for the 2020 valuations: introduction of a "reformed scheme only" design, wider 3% cost corridor, and an economic check.

HM Treasury has now published a policy paper setting out how, for the unfunded schemes and Local Government Pension Scheme (LGPS), "the ‘reformed scheme only’ design [of the CCM] will operate from the 2020 valuations onwards, including the interaction with McCloud remedy." Details of how the CCM will operate in the judicial pension scheme will be announced separately.

The aim of these changes is "to ensure that only costs of the reformed schemes will be assessed by the CCM from the 2020 valuations onwards. As the McCloud remedy relates to the legacy schemes, this impact will be removed, so that the remedy will not materially impact the CCM from the 2020 valuations onwards."

As the paper explains,  the McCloud remedy "was included in the CCM at the 2016 valuations given the design of the mechanism at the time which considered certain legacy scheme costs … However, the Government … announced that it would waive ceiling breaches that may occur at the 2016 valuations as it did not think it would be right to reduce member benefits based on a CCM that may not be working as intended and which it had asked the Government Actuary to review. The waiving of ceiling breaches was subsequently implemented through the Public Service Pensions and Judicial Offices Act 2022 (PSPJOA 22), which means that no member benefits have been cut as a result of the 2016 valuations."

LGPS | Response to consultation on changes to the costs management process

In our February 2023 newsletter, we reported that the Department for Levelling Up, Housing and Communities was consulting on changes to the LGPS Scheme Advisory Board (SAB) cost management process (CMP).

The changes proposed included amending existing LGPS regulations to bring the "cost control process in line with the scheme valuations in the other public service pension schemes every four years" in order to "align the government and SAB mechanisms and allow the SAB CMP to operate immediately prior to the" HM Treasury (HMT) Cost Control Mechanism.

The government has now published the response to this consultation. The response confirms the change to the cost control dates and the change to the requirement for SAB recommendations to bring the scheme back to the target cost. (These changes have been made by regulations which will come into force on 1 June 2023.)

A consultation on changes to regulation 115(2) (the government must take steps to bring the scheme back to the target cost where there has been a breach of the corridor under the HMT cost control mechanism) will follow once draft HMT valuation directions introducing the intended economic check are available.

NHS Pension Scheme | Changes to member contribution tiers

The Department of Health and Social Care has consulted on a set of draft regulations to "uplift the member contribution tiers [for the NHS Pension Scheme] in line with the Agenda for Change (AfC) pay award in England for 2023 to 2024. The intention of this change is to ensure that the member contribution structure continues to rise in line with the pay award, so that members do not pass into a higher contribution tier as a result of receiving the annual pay award."

Cyber security | TPR statement on Capita cyber security incident

The Pensions Regulator has published a statement in response to the recent cyber security incident impacting Capita. The statement is essential reading for all schemes who use Capita's services.

For all schemes, including those who do not use Capita's services, the statement confirms that the incident "shows the importance of having a robust cyber security and business continuity plan in place. Make sure you have read our cyber security guidance and check that your own plans are up to date."

Retained EU Law Bill | Change of direction

On 10 May 2023, the secretary of state for the Department for Business and Trade announced a change of approach to the Retained EU Law (Revocation and Reform) (REUL) Bill. She confirmed that the government was tabling amendments to the bill to "replace the current sunset in the Bill with a list of the retained EU laws that we intend to revoke under the Bill at the end of 2023.… Making it clear which regulations will be removed from our statute book, instead of highlighting only the REUL that would be saved. We will retain the vitally important powers in the Bill that allow us to continue to amend EU laws, so more complex regulation can still be revoked or reformed after proper assessment and consultation.… We will still fully take back control of our laws and end the supremacy and special status of retained EU law by the end of 2023."

These amendments were tabled at the report stage in the House of Lords, after which an updated bill (as amended on report) was published. The changes made include replacing the general sunset of EU derived legislation with a mechanism for allowing the specific pieces of legislation listed in a new schedule 1 to the bill (none of which relate to pensions) to be revoked at the end of this year. The sunset of directly effective rights from the end of 2023 has also been made subject to parliamentary oversight. The bill had its third reading in the House of Lords on 22 May, at which point further amendments were made. It will move forward to the penultimate stage (consideration of Lords amendments) on 24 May.

Funds should continue to follow the bill's progress.

Pensions dashboards | Three things to note

The Pensions Dashboards Programme has issued its seventh progress update report. This confirms that schemes should expect an update to the legislative timetable for connecting to the pensions dashboards architecture before Parliament rises for the summer recess in July. It also confirms that schemes should use this time to continue to prepare for connection and signposts actions and the Pensions Regulator's updated guidance and checklist.

Pensions Dashboards (Prohibition of Indemnification) Act 2023 received Royal Assent on 2 May 2023. The act changes the law to prevent pension scheme trustees or managers from being reimbursed out of scheme assets for any penalty for non-compliance imposed under the pensions dashboards regulations. It is not yet in force.

There has been a demonstration of a "fully operational front- and back-end pensions dashboard that demonstrates how a saver will be able to use a commercial pension dashboard to find and view their pensions". You can read more about this demonstration of an integrated service provider connecting and interacting with a commercial pensions dashboard service here.

Other developments | Q3 2023 pensions action plan

We have released our Q3 2023 Pensions Action Plan. Each action plan is a summary of changes and proposals in pensions law and regulation over the last quarter, most of which are also relevant to public sector pension schemes.

Topics covered include:

• The Pension Scams Industry Group's new interim practitioner guide on the 2021 transfer regulations, which includes guidance on topics including “clean lists”, the “overseas investment” flag and the “incentive to transfer” flag.
• Other pensions dashboard developments.
• The Pension Regulator's new guidance on equality, diversity and inclusion.
• The impact of "Green Day" and the government's new Green Finance Strategy on pension schemes.

To receive your copy of the Action Plan, please ask your usual Osborne Clarke contact.

The Pensions Ombudsman | Various

​Local Government Pension Scheme – Mr D (CAS-52488-R2F3)

The Pensions Ombudsman (TPO) has partly upheld a complaint by a deferred member of the LGPS  whose application for early payment of benefits on ill health grounds was refused by his former employer. The member had suffered hearing loss and argued that a hearing loss specialist should have been appointed to give the medical opinion in his case. TPO confirmed that the 1997 regulations did not require appointment of a specialist or an occupational health physician specialising in hearing loss. They refer to an independent registered medical practitioner (IRMP) with the necessary occupational health qualifications. However, at stage two of the internal dispute resolution procedure, Mr D had shared a report from "an audiologist with a detailed understanding of [his] incapacity". This report should have been referred to the IRMP with a request that she consider it and confirm whether it altered her opinion. It was not reasonable to decide that it would not affect the IRMP's opinion without checking with her.

TPO directed the former employer to refer the audiologist's report to the IRMP, ask the IRMP to give a clear opinion as to whether the report affects her opinion, and then retake its decision on early payment. The former employer had already paid Mr D £500 for distress and inconvenience and TPO directed that the former employer and the Council (the stage two decision maker) each pay an additional £250 in recognition of the serious distress and inconvenience caused to the member.

NHS Pension Scheme (CAS-35611-Z7D3)

TPO has also partly upheld a complaint by the widow of a member of the NHS Pension Scheme who would have been able to take his benefits in the form of a serious ill-health lump sum. The decision underlines the importance of having good systems and procedures in place for cases where members are terminally ill. It is also interesting because of TPO's decision in relation to the serious ill-health lump sum. The member died after early payment of benefits on grounds of ill health had been approved, but before he received an estimate of benefits and before he was able to complete form AW8P (a deferred benefits claim form). The widow said that the member would mostly likely have chosen to take a serious ill-health lump sum, but had no clear evidence to prove this. TPO concluded that, in the circumstances, it was not possible to say what decision the member would have reached. The death benefits would be those payable on the death of a deferred member, but the ombudsman directed the NHS business services authority to pay £2,000 to the member's estate for severe non-financial injustice (distress and inconvenience) caused to the member.

This newsletter covers developments relating to public service pensions in England and Wales, with a focus on the Local Government Pension Scheme.