The changes made to the Local Government Pension Scheme (LGPS) in 2014 (England and Wales) and 2015 for the other Public Service Pension Schemes, principally introduced Career Average benefits and an increase in retirement age. Alongside the changes made to the schemes, the Government also gave a commitment that all those members, within 10 years’ of retirement from 2012, would be no worse off under the new scheme.
This commitment or transitional protection, was challenged in the McCloud and Sargeant cases, and was ultimately found to be unlawful on the grounds of age discrimination.
In July 2019, the Government confirmed that the “McCloud Judgment” would have implications for all Public Service Pension Schemes including the Local Government Pension Scheme (LGPS), and since then, the remedy needed for the LGPS had been eagerly awaited.
In mid-July, the MHCLG Consultation came with full details of the remedy. Key features within the proposals included:
The proposals have really focussed the minds as regards implementation. Some of the proposals are very technical and will need careful consideration at both a local and national level. However, after talking to a number of LGPS funds, their immediate focus has been on:
We’d like to thank Jason Bailey and Simon Taylor who recently joined Nigel Thomas, to provide some insights on how their funds have approached their response to the proposals.
TO WHAT EXTENT HAD YOU STARTED PREPARATIONS BEFORE THE CONSULTATION WAS ISSUED?
Jason: The honest answer is to a reasonably limited extent. We started a working group back in June made up of senior members from different service areas, and started to look at what would be needed from a project perspective. We’ve met monthly, but I wouldn’t say we’ve progressed much beyond the planning stage at this point.
Simon: We took the view that it’s important to get up and running, and not sit back and wait for it to happen. We began preparations significantly in advance of the consultation release and began to warm up our employers around potential funding implications. We’ve given thought to a data collection exercise, and consequently placed some of our employers on alert. We’ve also considered some of the potential system changes and communication requirements.
NOW THE CONSULTATION HAS BEEN ISSUED, WHAT ASPECTS OF THE PROPOSED REMEDY ARE YOU FOCUSING ON?
Jason: The first is communications with scheme members and employers. We’re seeing a lot of interest from scheme members who are picking up different sources of information without necessarily understanding what it means for them. We’re having to spend some time producing some communications to make sure scheme members are informed, but also manage expectations and not create false hope that suddenly this could have a huge impact on people’s benefits.
The other thing is analysing how much work we will need to do with employers. We’re one of the fortunate funds that have kept up the practice of updating the hours since the 2014 scheme came into being, and I know that isn’t something all funds have done.
We’re also assessing whether we have been getting the information that we’ve asked employers to provide. We asked them to send hours information, but we’re not sure at this stage whether all employers did that. So we are determining whether there are some employers we might need to target for information.
Simon: Aside from responding to the consultation itself, there are four key areas we’ve been working on. The first is overall project planning, and establishment of key work streams and resourcing requirements. Secondly, identification and analysis of members in scope, to get a feel for the size of the potential task. We’ve also been engaging with our software provider about requirements, and finally, working on drafting some communication for our employers, to align to the material provided by the LGA.
Nigel: Many funds are looking at the data they’ve already received, and how they can fill any gaps. We’re hearing that many funds continued to receive data since the 2014 changes, although verification of that data has been mixed. We’re helping a number of funds develop plans to assess the quality of their data, and form a base from which they can move forward. We would encourage all funds to be doing the same as a starting point right now.
TO WHAT EXTENT IS THE PROPOSAL CAUSING YOU OR YOUR EMPLOYERS CONCERN?
Jason: There are currently no particular concerns from employers, because we haven’t asked them anything specifically - just made them aware of what’s going on. For us, my primary concern at this stage is how well prepared our software provider is going to be, and how much they’re going to be able to do for us when the time comes. I know funds will have an input, but it’s all unknown at the moment. I understand the reason why the remedy has been written in the way it has, and it makes sense in the main, but inevitably there will be a lot more work for us and it’s just understanding the scale it’s likely to be; it’s too much of an unknown at the moment.
Simon: The most prominent concern is our employers’ ability to provide the data needed in the format required to recalculate the benefits. There are big risks for employers who cannot do this. We’re hearing from our employers that concerns range from changes in payroll providers to potential costs associated with system changes, and we’d welcome guidance on how to deal with those cases.
There’s also an obvious need to develop effective communications with members, which would also benefit from a central steer. Whilst perhaps less of an impact on employers, resourcing will be paramount for administering authorities.
The final concern is the potential scale of work at a time when many other scheme reforms are coming in.
Nigel: The work needed to get complete data versus the cost of doing so needs to be balanced. Funds do have concern about the costs associated with that, and how to approach it if the data is no longer available. Communication also needs to be considered with the employers, members and other pension funds as well. How this can be performed efficiently to deliver what is needed requires careful consideration. Data verification and data cleaning is key, and we’ve been helping many funds perform that over recent years.
We’re helping clients explore the merits of each of the options available. Funds should be looking to their advisors for similar support to shape their way forward through this significant project.
HOW ARE YOU GOING TO RESOURCE THE PROJECT AND HOW ARE YOU FACTORING THAT INTO BUSINESS-AS-USUAL WORKLOADS?
Jason: It’s a good question and one we’ve thought hard about. We carried out quite a wide-ranging restructure of the administration service last year, and the new structure had only really been stabilised early this year. We brought in about a dozen or so new staff altogether. To give the team the best possible start, we’ve decided to ask our elected members for some more resource to enable us to prepare for the inevitable increase in workload. We’ve also found that Covid-19 and working from home has impacted our productivity, and we’re trying to do some analysis to work out exactly why that is.
Simon: Additional resource will be required. Our initial thoughts are that this will involve some form of hybrid approach, due to the complexity of the work involved. We’re looking at drawing from existing experience and knowledge, and perhaps backfilling to support some of the missing business-as-usual work arrangements where necessary. We’re also considering the use of advisors, while recognising that their resource is finite. There are only so many advisors to go round the LGPS.
Nigel: We know this is a huge project. Funds are exploring how they might approach this through additional recruitment, through redeployment of existing resources, and indeed outsourcing in part or in full. Over the years, a number of funds have asked us to help them with data cleansing and project tasks, and we’re talking to several about how we might support them in a similar way through this project. The right approach for each fund will be different and will be dependent on many different factors, but what is without doubt is the scale of the task: this should not be underestimated by any of the stakeholders.
WHAT ARE THE TOP THREE ITEMS ON YOUR WISH LIST EMERGING FROM THE CONSULTATION THAT WILL ULTIMATELY HELP YOU IMPLEMENT THE REMEDY?
Jason: The obvious one is the prioritisation question: what exactly should funds be focusing on initially, who are the most important members to look at first? I assume the answer will be people already receiving their pensions, but that’s a dangerous assumption to make. It’s important for software providers, so they know where they should be focusing their efforts.
The second thing is guidance for funds regarding employers who don’t have access to hours information. I’ve heard the LGA in particular talking about using Final pay data and care pay data and working out the ratio of those two. If that’s an approach that’s going to be accepted, will it be possible for funds to do that across the board and not go back to employers for hours information at all?
Thirdly is templates that will help us communicate the information to scheme members so they understand how the underpin has been arrived at. Alongside that, we need our teams to have the information presented to them in a way that that they can check and be assured that the underpin calculations are right. This is something that funds have not been as hot on as we need to be. It’s all very well working out an underpin figure, but that’s got to be meaningful to our membership. They’ve got to understand where it comes from.
Simon: The first would be standardised communications to support consistent messaging across the LGPS. Secondly, I’d like guidance for administrators on key areas. For instance, how to manage cases where data is unobtainable or in the wrong format. Finally, I’d like to see thought and consideration given to the timescales required to enable implementation. Funds depend on software providers to make the required system changes, to enable us to undertake administrative tasks. So finalisation of the regulations and clarity on interpretation would be welcomed as soon as possible.
Nigel: Clearly having listened to Simon and Jason, it’s data and communication. As part of our response to the consultation, we’re suggesting that the top priority should be a clear and consistent national approach on how to approach data gaps.
There should also be a requirement for an implementation plan, and a requirement and framework with key milestones and success measures. Critically, one of the success measures will be a communication plan, enabling everyone to be aware of the different steps that are approaching. We are asking for that as part of our response to the consultation.
Clearly, there are lots of things for LGPS Funds to consider and at the heart of this is making sure your members get the right benefits.
Funds need to focus on outcomes and whilst the initial priority may have been to respond to the Consultation, Funds should be thinking about how to ultimately get this project delivered efficiently.
If you haven’t already seen Mercer’s response, then please do let us know and we can share with you.
Our view on next steps:
What is clear to everyone involved the McCloud remedy implementation, across the whole of the LGPS will need a lot of work from everyone involved. Many Funds are preparing for the work needed, but for any that aren’t, after what Jason and Simon have said today, we urge you not to delay.
COMING SOON: We’re launching a series of regular virtual briefing events, specifically for Local Government Pension Schemes. We’ll be inviting guest speakers from funds to share their insights and views on topical issues and providing a forum for debate and discussion. We hope you’ll be able to join us.
For more information on how Mercer is helping Local Government Pension Schemes, please contact email@example.com.
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