Finance Diary: How a court ruling may affect your pension

Mazars financial planner Thomas Scrupps breaks down the Court of Appeal’s ‘McCloud’ judgement that may allow younger GPs to stay on older pension arrangements

In 2015, most public sector pension schemes, including the NHS Pension Scheme, underwent reforms. As a result, many NHS Pension members had to transition into new arrangements. However, other members closer to retirement could remain in the older sections of the scheme (1995/2008) for longer, or never have to transition to the new section developed under the 2015 reforms at all.

Following a 2018 review by the Court of Appeal, it was determined that enforcing the transition to the 2015 Section on younger members was discriminatory. As such, it was ruled that a remedy must be applied: impacted members must have the option to keep the relevant benefits in the older sections of the scheme if they wish. This remedy is known as the McCloud judgement.

Only benefits earned between 1 April 2015 and 31 March 2022 will be affected. This timeframe is known as the ‘remedy period’. (This reflects the period from the 2015 changes taking effect, through to the latest the discrimination could have applied.)

What were the changes between schemes?

Under the 2015 reforms:

• Pension changed to 1/54th of revalued earnings. Under the 2008 section it was 1.87% of uprated earnings, and in 1995 it was 1.4% of uprated earnings. It depends on personal circumstances which on these is most beneficial for an individual GP, but this judgement gives them the choice, and it is worth speaking to professionals for each particular case.
• Retirement age was changed to the state pension age, which is currently 66 but will rise from 2026. The retirement age in the 2008 section was 65 and 60 in the 1995 section.
• Doctors would not automatically receive a lump sum on retirement, though would have the option to exchange part of the pension – the same as the 2008 section. However, in the 1995 section it was three times the pension with an option to take more.
• There were also differences in death benefit lump sum, ill-health retirement and pensions to survivors.

Are you impacted?

Those impacted by the McCloud judgement must meet all the following conditions:

• Had pensionable service during the remedy period
• That pensionable service was in the 2015 Section (i.e. the newer arrangements, but would have been in the older sections if not for the discrimination)
• Were in pensionable service under the older sections of the scheme on or before 31 March 2012 (without a disqualifying gap* before starting pensionable service during the remedy period)
• Where there is more than one period of pensionable service during the remedy period, there must not be a disqualifying gap (otherwise the subsequent periods will not form part of the remedy)

* A disqualifying gap refers to a period where an individual was not a member of the associated pension scheme. It is defined as a break in membership of 5 years or more between NHS Pension Schemes, or more than five years where is it between another public sector pension scheme and the NHS Pension scheme.

How is the remedy being applied?

The c. 1.1m affected members of the NHS pensions scheme will now have had the relevant membership ‘rolled back’ – this means that, moving forward, the older sections of the scheme will continue to apply to them (as if they were never forced to transition).

At retirement, members will then choose whether to keep this ‘rolled back’ position or to revert back to the 2015 section. In the interim, as above, statements will reflect the ‘rolled back’ position.

A more immediate choice will be presented to members who have already retired, and to the beneficiaries of members who died within the remedy period – an amendment can then be made as needed. It is estimated that there are 250,000 members in this bracket and the Scheme is prioritising these affected members.

Wider considerations

It may be the case that affected members may wish to stay on the 2015 scheme. Each section of the Scheme has a different method of calculating the pension earned. As such, ‘rolling back’ affected years of service will not only change the underlying pension figures, but also the Annual Allowance position. The Annual Allowance represents the maximum that can be added to pensions each year (and still receive the associated tax relief).

As such, the correspondence to follow from the Scheme is expected to set out both the revised pension figures and the revised Annual Allowance position. This will be particularly relevant for those who have faced Annual Allowance tax charges in the past, as it may well alter the tax charge that should have been due. Crucially, once this correspondence has been received, affected members will need to act quickly – the deadline for adjusting figures relating to the Annual Allowance is 31 January 2025.

It is worth noting that a compensation scheme is now in place, both to compensate for financial loss arising as a result of the previous discrimination (that cannot be otherwise rectified through amending tax returns and similar) and for the cost associated with seeking advice in order to make a decision, recalculate previous Annual Allowance charges etc. The scheme has only recently been established, but those seeking advice as part of these decisions should explore the possibility of claiming compensation.

Choice 2 Exercise

In a similar vein to those affected by McCloud, many people took the decision to move their 1995 Section benefits to the 2008 Section as part of the ‘Choice 2’ exercise. The affected members should now have received correspondence that outlines their ability to revoke this decision, should they wish to. The deadline for this Choice 2 decision is 20May 2024.

This decision potentially has a knock-on effect on the wider McCloud judgement decisions, in that it may well effectively bring forward that ‘at retirement’ decision to return to the 2015 Section or not.

Naturally, these decisions are heavily dependent on individual circumstances and retirement plans, and so advice should be sought by the affected individuals.

Please note, the current ruling is specific to England & Wales, with further information from NHS Scotland yet to be released

Thomas Scrupps is a chartered financial planner in the Mazars healthcare team