Government to Impose McCloud Costs Despite Significant Opposition – DB & Derisking
Proposals to roll over membership dues rates and include the cost of the McCloud appeal in the 2016 valuation results elicited 1,257 responses, of which 1,253 opposed the plans.
The government said it would continue regardless, as there had been no cost cap overruns that could have warranted changes to benefits and contribution rates.
The results of this evaluation clearly show that the cost of the plan is 0.4 percent lower than the cost to the employer. As it is within the 2% margin specified in Treasury regulations, there is no change to membership benefits or dues.
A controversial decision
The Cabinet Office launched a consultation in November last year on how the McCloud remedy should be implemented in relation to members of the public service pension scheme.
All members transfer to the reformed plan, called “alpha”, from April 2022, while the legacy plan will be closed to future accruals from March 2022.
His plans for calculating membership dues rates were controversial, however. The consultation explained that membership fees “are generally set every four years as part of the cost control mechanism”.
“However, the cost control element of the 2016 valuations was suspended in light of the McCloud and Sargeant judgments, as uncertainty surrounding member benefits arising from those judgments made it impossible to assess with certainty the value plans for members,” he said.
The cost control mechanism resumed in July last year, and the 2016 assessments were finally able to conclude in October, with the Cabinet Office announcing that it planned “to roll over the 2021-22 membership fees in this draft regulation and we will consider whether any changes are necessary once the final results are determined”.
Plans to include McCloud’s repair costs, however, have angered unions, with several – including the Public and Commercial Services Union, Fire Brigades Union, GMB, Royal College of Nursing and Unite – filing a claim for judicial review in order to undo the changes.
The unions argue that the government had promised that favorable results in the 2016 assessments would result in higher benefits and lower contributions, and that these favorable results had in fact been achieved, only for the government to add the cost of the remedy. McCloud and thus change the result.
Mark Rowe, national head of the firefighters’ union, said in December: “The government is trying to make public sector workers pay through a pension scheme called ‘cost control’.
“Cost control adjusts pension contributions or benefits if the actual cost of the pension plan deviates from the target cost of the pension plan by 2 percent or more, with workers losing out if the actual cost is higher.
“It was the government that introduced the cost control mechanism in the new pension plan. The mechanism provided that the savings made through the new scheme would be passed on to these affiliates. The government now wishes to ignore the legislation that created this provision, the legislation that it introduced.
No limit exceeded
The government acknowledged the extent of the opposition, noting however that 1,239 of the 1,253 responses opposing its plans were identical, with members using a template provided by one of the unions.
These members argued that the contribution rates should be determined based on the outcome of the 2016 valuation without the inclusion of McCloud’s costs, believing that the inclusion of these costs would be illegal.
In response, the government said the 2016 valuations “determined that the plan cost cap is 0.4% lower than the employer cost cap. Since the result is within the 2% corridor specified in [Treasury] regulation, this means that no changes to benefits or membership fees are required as there is no violation of the cost cap”.
“There are currently two applications for judicial review against the inclusion of appeal costs in the cost control mechanism,” he continued, adding that “unless there is a judgment against at some point in the future requiring the recalculation of the 2016 valuation, we are required to base the assessments on the 2016 expert report which has just been concluded and which includes the recovery costs”.
Garry Graham, assistant general secretary of Prospect, reiterated his union’s view that “the inclusion of McCloud’s costs is illegal”. He added that Prospect is “monitoring legal action on this matter as an interested party.”
“The Cabinet Office and the Treasury should finalize the cost control mechanism without including McCloud costs, and implement the proposals of the Civil Service Scheme Advisory Council. The SAB proposals received the full support of employer and employee representatives.
“The Cabinet Office is to publish a timetable for finalizing the 2016 cost control mechanism and completing the 2020 assessment, including the implementation of membership contribution rates from April 2023.”
Irwin Mitchell’s partner Penny Cogher, however, told Pensions Expert that the government had “foiled the unions and the members here by completing the 2016 assessment on December 17, 2021”.
“The results of this evaluation clearly show that the cost of the plan is 0.4% lower than the cost to the employer. As it is within the 2% margin specified in Treasury regulations, there is no change to membership benefits or dues,” she explained.
“This means that individuals and unions have nothing to complain about. Members must continue to pay their dues. Going forward, the changes require active members to switch to alpha benefits beginning April 1, 2022 for benefit accrual.
McCloud rebellion grows as six unions seek judicial review
Six unions want to sue the government to stop it imposing the cost of the McCloud action on their members, with one considering a strike.
However, the judicial review applications have yet to be settled and Squire Patton Boggs’ partner Victoria Jeacock said it made it difficult to judge the legality of including McCloud’s costs in the 2016 valuation. .
“From the perspective of LGPS members, the current position pending the outcome of judicial reviews is highly uncertain, which in turn is unsatisfactory. Members need certainty on pensions and costs,” Jeacock said.