UK Public Service Pensions Update | March 2023

This month we highlight announcements made at the Spring Budget 2023 and look at developments relating to the McCloud remedy, the Local Government Pension Scheme (LGPS), pensions dashboards, pension scams, automatic enrolment and environmental, social and governance (ESG) factors.

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

Spring Budget 2023 | Key announcements

The chancellor of the exchequer delivered his Spring Budget 2023 on 15 March. You can read about the announcements relating to pension schemes in this Insight, and about the announcements made more generally in this one.

The McCloud remedy | Judicial review

In our last newsletter, we reported that the hearing of the Fire Brigades Union (FBU) and the British Medical Association's (BMA) claims for judicial review of the Public Service Pensions (Valuations and Employer Cost Cap) (Amendment) Directions 2021 had begun on 31 January 2023 and that five more trade unions had been named as interested parties: GMB, Public and Commercial Services Union, the Prison Officers Association, the Royal College of Nursing and Unite.

The applications for judicial review have been dismissed but there is the possibility of an appeal.

The grounds put forward by the FBU claimants are set out in paragraph 95 of the judgment, and those put forward by the BMA in paragraph 96. The FBU has published a circular in which it confirms that it is consulting its legal team on the possibility of an appeal and, in the meantime, has put in an application for permission to appeal on a protective basis.

The unions argue that the outcome of the costs control mechanism for the 2016 valuations should result in a reduction in member contributions or an improvement in benefits or both, and that the HM Treasury directions undo this by factoring in the cost of the McCloud remedy.

The McCloud remedy | Consultations

A number of departments have opened consultations on draft regulations (or policies to inform amendments) to be made under the Public Service Pensions and Judicial Offices Act 2022 in order to implement the retrospective part of the McCloud remedy: the deferred choice underpin under which members will be able to choose between legacy scheme and reformed scheme benefits for remediable service between 1 April 2015 and 31 March 2022:

• Cabinet Office, for the Civil Service Pension Scheme (consultation closes on 14 May 2023);
• Home Office, for the Firefighters' Pension Scheme (consultation closes on 23 May 2023);
• Home Office, for the Police Pension Scheme (consultation closes on 23 May 2023);
• Ministry of Defence for the Armed Forces Pension Scheme (consultation closes on 29 May 2023); and
• Department of Health and Social Care (DHSC), for the NHS Pension Scheme (consultation closed on 6 June 2023).

As one of the consultation documents explains, the McCloud remedy for these schemes has two parts:

• "to ensure equal treatment for all members within each of the main public service pension schemes by moving all members into the new schemes on 1 April 2022 irrespective of age"; and
• "to remove the effect of transitional protection by offering eligible members a choice over the set of benefits (legacy scheme or 2015 scheme) they wish to receive for any pensionable service during the period 1 April 2015 to 31 March 2022."

The McCloud remedy | Data guidance

The Local Government Pension Scheme Advisory Board (LGPS SAB) has published further guidance for LGPS administering authorities to help them to "recreate notional final salary membership for the McCloud remedy period". It "reconfirms what data is needed and considers the options if administering authorities have not been able to collect the necessary data, or they have reason to believe it is not accurate. It also suggests a method for checking notional reckonable service in the remedy period".

LGPS | Scheme revaluation date changed from 1 to 6 April

In our last newsletter, we reported that the Department of Levelling Up, Housing and Communities (DLUHC) was consulting on draft regulations to change the LGPS revaluation date from 1 to 6 April in order to avoid members of the scheme being exposed to an annual allowance charge due to a mismatch between the Consumer Prices Index (CPI) figure which would otherwise be used for scheme revaluation (10.1%) and the CPI figure by which a pension can grow without contributing to an individual's pension input amount (PIA) for the 2022/23 tax year (3.1%).

DLUHC has since published a consultation response in which it confirms that it will go ahead with this change and sets out the amendments it has made to the draft regulations in order to take account of feedback received. The regulations have been made and will come into force on 31 March 2023.

LGPS | Response to consultation

In our last newsletter, we also reported that the DLUHC was consulting on changes to the LGPS SAB cost management process (CMP).

The LGPS SAB has now published its response to that consultation. The response includes a note that there is no mention in the consultation of how the McCloud underpin will be dealt with and so SAB "assume that the Board will be able to determine that for itself, in line with its discretion to set other key assumptions (like discount rate). If that is not the case, then the Department needs to set out as part of this process how those costs need to be accounted for in the CMP process".

The changes proposed include amending existing regulations to bring the "scheme valuation and 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 cost control mechanism. The consultation closed on 24 March 2023.

NHS Pension Scheme | Response to consultation

In our December 2022 newsletter, we reported that the DHSC had opened a consultation on changes to the NHS Pension Scheme primarily to help retain experienced NHS clinicians and remove barriers to returning to work from retirement. The DHSC has now published its consultation response. The response confirms that the department intends to proceed with the changes and sets out intended timescales. Regulations have also been made.

Contributions | Police and Civil Service pension schemes

The Home Office and Cabinet Office have laid reports before Parliament in relation to member contribution rates to the police and civil service pension schemes from 1 April 2023. Related regulations have been made for the Police Pension Scheme.

Pensions dashboards | Changes to connection deadlines and guidance

On 2 March, the Department for Work and Pensions (DWP) issued a written ministerial statement explaining that the Pensions Dashboards Programme (PDP) will be unable to meet the deadlines for connection set out in legislation, and that the connection timeline will need to be revised. "PDP is working with DWP to establish a new and achievable plan for delivery" and "DWP will legislate to provide new connection deadlines. Further information on the revised timeline will be made available following agreement on PDP’s delivery plan."  

The PDP has since published frequently asked questions on this development. The answers include a link to the Pensions Regulator's initial guidance on preparing for pensions dashboards, which has been updated and now includes a revised "preparing to connect" checklist. Funds should continue to prepare for connection.

Pension scams | New PSIG guidance on 2021 regulations

The Pension Scams Industry Group has published a new interim practitioner guide to help schemes to apply the 2021 regulations on protecting members from scams. The practitioner guide includes guidance on topics including "clean lists", the "overseas investment" flag and the "incentive to transfer" flag. The code itself will be updated once the 2021 regulations have been updated or amended to address the "mismatch between the DWP stated policy intent and certain clause wording".

The interim practitioner guide is essential reading for all schemes.

The introduction to the guide says that "[t]he points of greatest concern to us are the inclusion of widely defined “overseas” investments in a receiving scheme as an amber flag and the broad definition of an offer of an “incentive” as a red flag. We will work with the industry and DWP to clarify these, and other inconsistencies, as soon as practicable. In the meantime, this Guide will summarise the regulations and how to comply with them as well as practical steps for ceding schemes to take (where they have the power to do so)".

Automatic enrolment | Consultation this autumn on extending scope

A private member's bill is proceeding through Parliament which will give the government power to make regulations to extend automatic enrolment to those aged 18 or over and to reduce or remove the lower qualifying earnings limit. The government has confirmed that it supports the bill and that there "will be a consultation on the implementation approach and the timetable" for the expansion of automatic enrolment. The government will hold a series of roundtables as it moves towards the consultation and will involve trade unions. It "would like to launch the consultation in the autumn", with the changes taking effect in the “mid-2020s”.

ESG | New TPR campaign and taskforce on social factors

The Pensions Regulator (TPR) recently announced that it will run a campaign in the spring of 2023 to ensure pension trustees are complying with their duties in relation to ESG and climate-change factors. For funded public service schemes, soon to become subject to climate risk reporting requirements, this development underlines TPR's commitment to compliance in this area. You can read more in our Insight.

Following the government's consultation on consideration of social risks and opportunities by occupational pension schemes, a taskforce on social factors has been set up to "identify reliable data sources and other resources, which could be used by pension schemes to identify, assess and manage financially material social risks and opportunities; monitor and report on developments relating to the International Sustainability Standards Board (ISSB) and other international standards; and develop thinking around how trustees can identify, assess and manage the financial risks posed by modern slavery and supply chain issues". The taskforce will "operate for one year and deliver guidance and recommendations to the pensions and investment industry. In addition, its work will contribute to further development of wider social factor principles, international standards, and metrics". You can read more here.

TPR has also recently published a review of a selection of pension schemes’ annual climate reports, which has revealed several areas for improvement for schemes and some emerging good practice.

Pensions Ombudsman | Various

Mrs Y - NHS Pension Scheme (CAS-41364-B2L7)

The Pensions Ombudsman (TPO) has partly upheld a complaint by a member of the NHS Pension Scheme that she agreed to settle a dispute with her employer in reliance upon, and otherwise relied upon, a series of incorrect benefit quotations. One of the factors in the decision was that the pensionable pay figures included in the quotations were much higher than the member's actual pay at the time, and this "should have rung an alarm bell" for her. She could have queried the meaning of pensionable pay if she was not sure what it meant.

Ms Y - NHS AVC Scheme (CAS-60966-T7C0)

TPO has also partly upheld a complaint by another member of the NHS Pension Scheme that the payroll provider did not deduct additional voluntary contributions (AVCs) from her salary when instructed to do so and that this caused a delay in her AVCs being invested and meant that she missed out on tax relief and investment returns.

TPO decided that both the payroll and the AVC provider had missed "numerous opportunities to ensure that Ms Y's AVCs were collected correctly and invested in accordance with her instructions" and this amounted to maladministration. However, the AVC provider had told the member to check her payslips for the first two months to make sure that the contributions were being deducted. She had not done this and so had not mitigated her financial loss. In view of this, the only direction made was that the payroll provider and AVC provider between them pay £1,000 to Ms Y in recognition of the serious distress and inconvenience caused.

House of Commons Library briefing papers | New and updated

The House of Commons library has published or updated the following briefing papers, which might be of interest to public service pension schemes and employers:

• Spring Budget 2023: a summary;
• Pension tax relief: the annual and lifetime allowance;
• Pensions (Extension of Automatic Enrolment) (No. 2) Bill;
• The (new) Data Protection and Digital Information (No. 2) Bill 2022-23;
• Northern Ireland Protocol: The Windsor Framework;
• Reform of pensions tax relief;
• Sanctions against Russia.

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