No silver lining in McCloud judgement for independent schools

The 2011 Hutton report (a complete structural review of public sector pensions) recommended that all unfunded defined benefit pension schemes were reformed in 2015 and benefits were reduced to be less generous (and less costly to provide) in future.

Prior to April 2015, benefits were provided on a final salary basis, but the reforms introduced CARE – career average revalued earnings – basis benefits. While still classed as a defined benefit, pension accrued on a CARE basis is typically less generous than the final salary calculation. The reforms also introduced a later Normal Pension Age (NPA) for CARE pensions to reflect the fact people have been living longer.

Transitional (protection) provisions were also introduced with the aim of ensuring that any changes would not financially impact those slightly older members who are therefore closest to their NPA.

Transitional protection applies to those members who (as at 1 April 2012) were within 10 years of the NPA for the scheme concerned – they were allowed to stay in their existing scheme. In addition, some schemes also have tapered protection for those members who were between 10 and 13.5 or 14 years of NPA, which allowed members to stay in their existing scheme for a period ranging from a few months to several years.

Who is McCloud and what is the judgement about?

Victoria McCloud is a High Court judge and a member of the Judicial Pension Scheme (JPS). She argued that the transitional provisions discriminated against younger members of the JPS. A similar dispute was raised by the Fire Brigades Union against the Firefighters’ Pension Scheme (FPS).

The McCloud judgement refers to the Court of Appeal’s ruling in December 2018 that the reforms unlawfully treated scheme members differently based upon the members’ age on 1 April 2012. They noted that ‘the manner in which the transitional provisions have been implemented has given rise to unlawful direct age discrimination’.

The Government’s 2019 request for permission to appeal to the Supreme Court was dismissed, and the case was remitted to Employment Tribunal remedy hearings to agree a remedy for claimants.

Whilst the McCloud judgement applies specifically to public sector pension arrangements for judges and firefighters, the Government accepted that the Court of Appeal decision has implications for all public sector pension schemes. This includes the Teachers’ Pension Scheme (TPS).

What does this mean for the TPS?

Every four years the Government Actuary’s Department undertakes an actuarial valuation of the TPS and all other unfunded public sector defined benefit pension schemes. The latest valuations commenced 31 March 2020.

The results of the TPS valuation won’t be known until 2022 at the earliest, more likely in 2023. The outcome dictates whether the employee and employer contribution rates have to increase to fund the benefits of the current and future pensioner members of the scheme.

The employer contribution rate increased by a massive 43% from September 2019 following the 2016 TPS valuation – many independent schools are now concerned that the rate could rise substantially again. They are right to be concerned.

There are many factors that affect valuation outcomes – changes in expectations of how long people will live and the long-term economic growth of the UK being key elements. This time around the implications of McCloud will also have to be taken into account – costs associated with removing the age discrimination could be £17bn across all unfunded public sector defined benefit pension schemes.

The Government has recently launched a consultation seeking views on two proposed methods of remedy for the unfunded public sector schemes. Under both proposed methods, eligible members will have a choice of receiving benefits from either their legacy or reformed schemes in respect of the remedy period. The consultation runs until midnight on 11 October 2020.

The document is lengthy, but states (2.59 on page 32): “The costs of removing the discrimination will feed into future employer contribution rates once the 2020 scheme valuations are completed.” Which is not good news.

Conclusion

TPS contribution rates are likely to increase again in 2022 or 2023 and schools are concerned about this. Industry estimates are that the employer contribution rate could increase from 23.6% to as high as 30%. Over 160 independent schools will have left the TPS by September 2020 and we expect many more to follow.

We believe that any schools considering TPS exit should realistically be aiming for Easter 2021 at the earliest. This will apply to all but the very smallest of schools who could still potentially achieve TPS exit by January 2021. If TPS exit is being considered then schools need to be taking positive action now to secure their future.

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