United Kingdom

Aon says measures in MHCLG consultation on McCloud present a real challenge

LONDON, 16 July 2020 – Aon plc, a leading global professional services firm providing a broad range of risk, retirement and health solutions, has said that the changes outlined in response to the McCloud case by the Ministry of Housing, Communities & Local Government’s (MHCLG) consultation on the proposed amendments to the LGPS in England and Wales, will present a significant challenge for administering authorities and employers.

Virginia Burke, senior consultant at Aon, said:
"We expected the changes in the MHCLG’s consultation to be testing and that has proved to be the case. The changes present a significant challenge to administering authorities and to employers, not least of which will be a major data collection exercise to enable the final salary underpin to be calculated.”

While benefits accruing from 1 April 2022 will be career average for all members, the new underpin will require 2008 scheme pay to be recorded for some members for the next 40 years. 

Virginia Burke continued:
"Given the potential complexities of implementing an underpin both retrospectively and for decades to come, administering authorities will need to critically study the draft regulations in detail and highlight areas where changes may be needed in their response to the consultation. It would be a mistake to think that this can all be solved by changes to the administration software and it's vital that funds understand the resource implications for their fund.

“Additionally, the importance of the changes is such that we expect Local Pensions Boards and Pensions Committees to be involved in the governance of funds' McCloud implementation programmes and so early engagement during the consultation and regular reporting during delivery will be essential."

The key proposals set out in the consultation are:

  • A new final salary underpin will apply to membership between 1 April 2014 and 31 March 2022
  • The changes will affect active members of a public service scheme on 31 March 2012 who went on to have active membership in the LGPS on or after 1 April 2014 and didn't have a disqualifying break in service.
  • Early leavers, retirements, survivor benefits for those who have died, those who have transferred out or elected trivial commutation since 1 April 2014 will fall into scope of the new underpin, meaning their benefits must be checked to see if the underpin applies retrospectively
  • As early and late retirement reductions will now be taken into account in the underpin. comparison, the underpin check will need to take place on leaving active membership and on subsequent retirement.
  • The option to aggregate benefits will be re-opened for a period of 12 months to allow members to secure underpin protection where that wouldn't apply if their benefits remain separate.

Virginia Burke added:
“As well as changes to ongoing administrative systems, processes and communications, the recalculation of leavers' benefits represents an enormous task, covering retirements, deferred leavers, deaths, transfers, trivial commutations and other leavers. It is therefore vital that administering authorities plan how they will deliver all aspects of McCloud and start to engage with employers to obtain data going back to 2014.”

About Aon

Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

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