Articles - McCloud regulations need to be clarified as soon as possible

Aon has called for the UK’s Ministry of Housing, Communities and Local Government (MHCLG) to outline the McCloud regulations for the Local Government Pension Scheme (LGPS) in England and Wales, as soon as possible given the significant issues the regulations will pose. At the same time and to avoid further delays, Aon is urging LGPS scheme administrators to move ahead where possible with preparations for the changes.

 The McCloud judgment is expected to affect around 1.5 million members of the LGPS and the job of implementing it would, at the best of times, present a significant challenge to administrators. There is a fear that they could easily be overwhelmed by the amount of change facing them over the next couple of years, as the changes will be combined with arrangements for the £95k cap, the cost management exercise, GMP indexation/equalisation, new employer flexibilities, normal day-to-day operations, and, currently, the challenges presented by the COVID-19 pandemic.
 Alison Murray, partner at Aon, said: “We understand that the Government’s preference is for changes to the Public Service Pensions Act (which is required to implement the McCloud judgement in the unfunded schemes) to be made before amendments to the LGPS Regulations are finalised. The hope had been that this would not unduly delay the LGPS legislation. However, with the various other legislative priorities at present, the timetable appears to be at risk.
 “Given the significant issues with the mis-timing of legislation from different parts of Government in relation to the exit cap, it really would be disappointing if McCloud changes to the LGPS were also delayed due to external factors. It is therefore imperative if MHCLG is unable to ensure the LGPS regulations can be finalised in good time, that it provides software providers with enough detail on the content of the final LGPS regulations to ensure the provisions can be implemented by the effective date - and that benefits for those leaving over 2014-2022 are reviewed as quickly as possible thereafter.”
 Alison Murray continued: “Despite all this, at Aon we have been helping our clients plan their McCloud implementation and to progress the areas that they can control. That includes data collection, initial member/employer communication, identifying the resources they are likely to need, as well as planning mitigations for the risks of delayed regulations and software changes.
 “These activities will put them in the best possible position to implement the McCloud legislation alongside all the other challenges they face in 2021 and beyond. Many are taking advantage of using an independent project manager as that frees up time for pension managers and other senior staff who would otherwise have to commit a great deal of time and worry to setting up and running the McCloud project.”
 Software issues
 Virginia Burke, senior consultant at Aon, said: “This is not just a matter of legislation needing to make its way through the system. Another cause for concern among LGPS administrators is that most of them rely on external providers for their administration software. Changes to administration systems can take a year or more to implement and until the software is updated and tested, administrators will be unable - without an unsustainable amount of manual intervention - to administer casework in line with the new regulations, let alone to review all the calculations for members who have already left service.
 “If systems and processes are not updated in time, there could be a snowball effect on administering newly retiring members’ benefits, death benefits, transfers, etc, leading to backlogs and repercussions for other work within the team. Faced with this, administrators will struggle to deal with the McCloud leavers’ benefits review. This could mean members who are receiving benefits might actually be getting paid less than they are entitled to for a significant amount of time. That could lead to complaints and, in the worse-case scenario, financial loss and hardship.”

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