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How might the McCloud judgment affect your Armed Forces Pension? In particular, what impact will it have on pension sharing in a divorce?

What is the McCloud judgment?

In 2015 the Government introduced reforms to all Public Sector pensions. Most Public Sector workers were transitioned into new pension schemes with less generous benefits, but older workers were protected from that change and were allowed to remain in the original more generous schemes.

In 2018, a case brought by some firefighters reached the Court of Appeal. The judgment in that case (McCloud) ruled that the elements of the rules put in place in 2015 which protected the older workers only was discrimination on the basis of age, as only those of a younger age were affected adversely by the changes.

That means all Public Sector pension schemes have to take steps to remedy the aspects of the reforms which were discriminatory.

What is the remedy for those with an Armed Forces Pension?

After a consultation period, the government announced its remedy to address age discrimination. That was as follows:

  1. to ensure all AFPS members transferred to the new scheme by 1 April 2022 to end the discrimination, so the affected period for AFPS 2015 members was between 1 April 2015 to 31 March 2022.
  2. the following which are due to happen by 1 October 2023:
  • A return for members who moved to the 2015 scheme back into the 1975 legacy scheme for their pensionable service during the remedy period (the “rolled-back benefits”).
  • For their remedy service benefits, a choice of whether to receive 1975 scheme benefits or 2015 scheme benefits, both of which are payable from the 1975 scheme. This is referred to as the ‘choice/remedy election’.

When is the election made?

Pensioner members (i.e. where the pension is already in payment) have to make their election within 12 months of their immediate choice remediable service statement being sent.

We understand that eligible active or deferred members will be able to make a deferred choice at the time when their pension benefits become payable. The deferred choice decision will become part of the process for members retiring or claiming deferred benefits.

Financial advice will need to be taken by the member on retirement to make the decision about which option (1975 or 2015 scheme) would be better for them in retirement.

How does this impact on pension sharing in a divorce?

For those going through a divorce, their pensions will be subject to the court’s discretionary power to share the pension with their spouse now based on current values. The cash equivalent value (CEV) has always been based on the existing scheme and the underlying actuarial calculations which are used to calculate the value of the benefits within the scheme.

From October 2023 we understand that the AFPS15 scheme CEV will automatically factor in the potential choice of the scheme member to revert for the period of service from 1 April 2015 to 31 March 2022 to the potentially more beneficial 1975 scheme benefits.  Whether that happens remains to be seen.

If a pension sharing order has already been made in respect of the 2015 scheme on the basis of an old style CEV (pre October 2023), we understand from actuaries advising on pension sharing options in divorce that if the pension credit would have been higher had the member’s benefits been treated as being in the 1975 scheme for the relevant period, then the scheme manager must “top-up” the pension credit member’s account with additional benefits, regardless of the election made by the ex-spouse scheme member whose pension was shared.

For pension sharing orders was agreed before October 2023 new CEVs are available for the 2015 scheme, it may be the case that the AFPS administrators will apply the % pension sharing order to the rolled-back benefits within the 1975 scheme as well (whereas ordinarily the 1975 scheme would require a separate pension sharing order to be shared).

This is based on draft guidance issued and so it is essential to take specialist pensions advice in every case and for people negotiating settlements based on pre October 2023 CEVs for the 2015 scheme to consider delaying and obtaining an updated CEV.

Key points to look out for

  1. If you are the scheme member going through a divorce, avoid transferring 100% of your 2015 scheme to your spouse because you would lose the right to make the decision on retirement about whether to revert to the legacy scheme and this would pass to your spouse.
  2. Many actuaries are therefore setting out pension sharing options on divorce which include a 50% pension sharing order against the 2015 Armed Forces Scheme so that both spouses benefit equally from any options given on retirement. Any adjustment to equalise overall incomes on retirement is then made from sharing other schemes available.

Always take advice from a specialist family lawyer and invite them to instruct an actuary to advise on pension sharing where Armed Forces Pension Schemes are concerned. There are many nuances to the schemes that need to be factored in appropriately so that a fair outcome can be achieved.

For more information about the different Armed Forces pension scheme, click here.

If you would like to discuss pension sharing or an Armed Forces pension, please get in touch and our Family team would be happy to assist you.