What is the Cost cap?
In 2014 the LGPS reformed to become a CARE scheme. It was understood, at this time, that the cost of funding future pension benefits would be 19.5% of an employee’s salary.
As a part of the reform, and to ensure the ongoing affordability of the LGPS, the Government introduced a ‘cost cap’ mechanism. This new mechanism involves checking the cost of LGPS pension provision every four years to ensure that these costs have not materially changed. In the event that the actual cost fell within 2% of 19.5%, no changes would be made to the Scheme’s design. But if it fell outside this range, changes would be needed.
The 2016 valuation showed that it cost less than 17.5% to fund future pension benefits, and so benefit improvements were expected to be made. However, a high profile court case the ‘McCloud Judgment’ has meant that the cost of funding pension provision has changed.
What is the McCloud Judgment?
The McCloud judgment was a Supreme Court case about members of the judicial and firefighter pension schemes. When these schemes reformed to become CARE schemes, only older members were given a protection to ensure that the move to CARE was not detrimental to their benefits. The McCloud judgment ruled that this protection was age discriminatory to their younger members.
The LGPS, has a similar age based pension protection, and in July 2020 the Government launched a consultation on extending the pension protection given to older LGPS members to all eligible members.
How has the McCloud judgment affected the Cost cap?
The cost of extending the pension protection now needs to be worked into the 2016 valuation result, and it is expected this will result in an increase to the cost of pension provision. This means that once the cost of extending pension protection is factored into the 2016 valuation results, changes to the scheme design may or may not take place.
Under the Government’s proposals, for LGPS members to be eligible for pension protection, they’ll need to have been a contributory member of the LGPS on 31 March 2012 and also have pensionable service in the LGPS after 31 March 2014.
Members who qualify may not see a change to their pension as a result of this protection. This is because when they retire, they’ll receive the better of the pension they’d have built up during the period 1 April 2014 to 31 March 2022 (the protection period) if the LGPS had not reformed and the pension they’ve built up under the reformed CARE scheme.
As pension benefits build up much faster under the reformed CARE scheme, many members won’t be impacted by this change. Additionally, for those members who do benefit from the protection that underpins the pension rights they build up during the protection period, the improvement to benefits will only be visible at retirement.
The regulations that will allow the remedy to be implemented are expected to come into force on 31 March 2022. It’s important to note that the protection will apply automatically, and you don’t need to ‘claim’ it if you’re eligible and we’re aiming to show any underpinned pension you might be entitled to on your 2022 annual pension statement.
For more information on McCloud please see the updated Q and A from the LGPS.