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Pensions and the McCloud Judgment - Lester Aldridge for Lymington

Pensions and the McCloud Judgment

After the family home or other properties, pensions are often the next largest asset that people own. Lester Aldridge explains what you need to know, especially if you're a public sector employee and getting divorced!  

Ed note: This month's "Life Matters" article by Lester Aldridge explains how different types of pension schemes will have different valuations which are important to understand, especially if divorce settlement is in the equation. And the government's recent announcement has muddied the water still further. Read on to understand!

McCloud Judgment: the impact on public sector pensions, pension-sharing orders and divorce

piggy bank with peopleAfter the family home or other properties, pensions are often the next largest asset that people own. It is therefore important to understand the value of your pension and the value of your spouse’s pension, particularly if you are going through a financial divorce settlement.

If you’re dealing with divorce and financial settlement and would like further advice regarding the division of pensions on divorce, please contact Lester Aldridge on 01202 786161.

Different types of pension schemes:

There are different types of pension schemes and you’ll need to know which type you fall under to understand how it can be valued. It is also worth remembering that a person may have multiple pensions and they can each be of differing types. 

We’ve set out the main types of pension schemes below:- 

State pensions 

This is the relatively easy part. You can calculate your forecasted government state pension for free using the government’s online calculator

Private pensions 

A private pension is not funded by the state but is instead either set up by yourself or by your employer through your work. Although there are various private pension schemes that you or your employer can invest in, typically your private pension will either be a defined contributions (DC) scheme or a defined benefits (DB) scheme. 

For defined contributions pension schemes, the pension ‘pot’ is defined and valued based on the contributions you and your employer pay in. 

Public-sector pensions 

There are many public sector pension schemes such as Police, NHS, Teachers, Armed Forces, Civil Service, Judicial and Local Government and these pensions all fall under defined benefit schemes. 

Defined benefits pension schemes, in contrast to defined contributions, are not defined based on how much is paid in but by the benefits that the pension scheme promises on retirement. The value of a defined benefits pension scheme is, therefore, trickier to determine as the pension contributions paid in do not automatically reflect the value of your pension.

The McCloud case

In 2015 the government introduced a new pension policy across public sector roles. Members were automatically moved onto the new pension scheme if they were over 14 years away from retirement age, however, the government decided that members who were less than ten years away from their retirement age could stay on their existing scheme indefinitely until they retired. Those aged in between were subject to a tapered transfer date from 2015 until February 2022 to then transition those members from the old scheme to the new scheme.

In the case of Lord Chancellor and Secretary of State for Justice and another v McCloud and others and Sargeant and others v London Fire and Emergency Planning Authority and others) [2018] EWCA Civ 2844 (also known as the McCloud Judgment), the Court of Appeal found that the government had acted in a manner that unlawfully treated the pension members differently based on their ages.

Following that judgment, the government announced in February 2021 that they would reform the 2015 public sector pension schemes to remove all and any form of age discrimination. The old schemes will now close to all members on 31 March 2022 and only the new schemes will operate thereafter. 

This will now impact the valuation of those affected public sector pensions while they are in the process of reformation, which will in turn impact pension arrangements on divorce. It is therefore important to know whether you or your spouse’s pension may be affected by these changes.

For the time being, we’ve set out below whether you would or would not be impacted by the McCloud judgment for the discriminatory period if you have a public sector pension:  

  1. Left before 1 April 2015?

Your public pension shouldn’t be affected. Those who left their public pension schemes before 1 April 2015 will remain on the old scheme and won’t have been moved into a new scheme.  

  1. Joined after 1 April 2012?

Your public pension shouldn’t be affected. Those who joined a public sector job, and therefore a public sector pension, between the dates of 1 April 2012 and 31 March 2015 will only have benefits in the new scheme post-2015.

  1. Joined after 1 April 2015?

Those who joined after 1 April 2015 will always only have benefits in the new schemes so won’t be impacted.

  1. Joined before 1 April 2012 and were still in service after 1 April 2015?

Your public pension may be affected. The affected members are typically those who joined before 1 April 2012, with a public sector pension, and were still in service and part of that pension scheme after 1 April 2015. 

These members may have been given a ‘tapered transfer date’ between 2015 and 2022, however, under the government’s new plans for reform, these members will need to choose whether to opt for the old scheme or the new scheme for the 2015 to 2022 period. 

It isn’t a simple situation of saying the old scheme was ‘better’ and the new scheme is ‘worse’ as it will depend on the individual member and their existing benefits and accruals. As a result the government now plans to present those affected with calculations of both schemes i.e. what their benefits would be if they’d stayed in the old scheme, or if they had moved to the new scheme for that 2015-2022 period. This is to enable people to make an informed choice about which pension scheme would better suit them for that 2015-2022 period. However, the information and calculations won’t be available until 2023 at the earliest.  

The effect of the McCloud case on divorce and financial settlements?

If you or your spouse are one of those public pension members affected by the government’s 2015 policy and latest reforms then this means that the value of your pension may change depending on the government’s calculations provided from 2023 onwards as to whether the old scheme’s or new scheme’s benefits will be the better option for that particular pension. 

This may prove a challenge to agreeing to a pension share with your spouse before 2023 as either your or their pension value may be subject to the change in the future. 

Alternatively, if you have already implemented a pension sharing order and since found out that your or your ex-spouse’s pensions may have been affected then you may both receive a retrospective uplift following 2023. 

Emma Ritchie solicitorWe recommend that where one of you have a public sector pension impacted by the government’s recent announcement, particularly if you are looking to arrange a pension share on divorce, that you seek an IFAs and/or pension actuary’s expert advice. While they may not be able to advise you before 2023 as to whether the old or new scheme would provide better benefits for the 2015-2022 period, they may be able to advise you on the merits and risks associated with pension sharing before the 2023 calculations are provided by the government. 

If you’re dealing with divorce and financial settlement and would like further advice regarding the division of pensions on divorce, please contact us on 01202 786161.

Emma Ritchie, Solicitor

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