The McCloud judgment might affect your Armed Forces Pension and, if you are going through a divorce where pension sharing is relevant, it may impact the valuation of your pension scheme and how it is shared.
What is the McCloud Judgment and Why Does it Matter?
In 2015, the Government introduced reforms to all public sector pensions, including the Armed Forces Pension Scheme (AFPS). 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, constituted discrimination on the basis of age, as only those of a younger age were adversely affected by the changes.
As such, the McCloud judgment means all public sector pension schemes, including the AFPS, have to take steps to remedy the aspects of the reforms which were ruled as discriminatory.
How Does the McCloud Judgment Affect Armed Forces Pensions?
After a consultation period, the Government announced its remedy to address the age related discrimination. That remedy consisted of:
- Ensuring that all AFPS members who remained in service were transferred to the new scheme (AFPS 15) from 1 April 2022, to end the discrimination. As such, the remedy period is 1 April 2015 to 31 March 2022.
- Ensuring that eligible members are offered a comparison of their benefits for that remedy period. Depending on their circumstances, the choice is between:
- Benefits calculated under their legacy scheme (AFPS 75 or AFPS 05).
- Benefits calculated under AFPS 15.
AFPS members make their choice through a Remediable Service Statement (RSS) – this compares the value of the benefits under both options, enabling the member to make an informed decision.
When Can Armed Forces Pension Members Make Their McCloud Election?
Members whose pensions were already in payment before 1 October 2023 are invited, on receipt of an RSS, to choose whether to retain their existing scheme benefits or choose alternatives stemming from the remedy period. These members, collectively known as the ‘Immediate Choice’ cohort, have to make their election within 12 months of their RSS being sent.
Eligible active or deferred members are able to make a deferred choice at the time when their pension benefits become payable. The deferred choice decision is part of the process for members retiring or claiming deferred benefits.
Almost 3 years on, many AFPS members are still receiving their RSS. The Ministry of Defence and Veterans UK are still working through what is proving to be a very lengthy implementation process.
Financial advice needs to be taken by the member on retirement when making the decision about which option would be better for them in retirement. Questions surrounding length of service, retirement age and tax considerations will need to be considered.
How Does the McCloud Remedy Affect Pension Sharing in 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. There is an entitlement for spouses to share pension provision built up during their relationship and sometimes, if needed, that can apply to pension provision accrued before or after the relationship period.
The McCloud judgment has caused there to be greater complexity when valuing the AFPS for divorce purposes. Such valuations need to take into consideration that the member is able to choose between AFPS 15 or their legacy scheme (AFPS 75 or AFPS 05) for the remedy period.
Updated Cash Equivalent Values (CEVs) produced since October 2023 now factor in the remedy framework and will work on the highest of the two potential scheme values. It is essential not to rely upon older CEVs as they will not accurately reflect the member’s actual entitlement.
To ensure the impact of McCloud is factored into pension sharing on divorce, it is important for members to obtain specialist Pension on Divorce Expert (PODE) advice.
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.
This article was co-written by Sarah Atkinson, Partner and Grace Osborne, Trainee solicitor in our Family Law team.