Those working in the Pensions on Divorce arena (whether PODEs, solicitors or scheme administrators) will by now be all too familiar with the McCloud ruling, and how much additional work this has caused for cases involving public sector pension schemes.

To quickly recap, the McCloud ruling requires (i) for the pension administrators to record all pensionable service from 1 April 2015–31 March 2022 (or earlier exit) to be treated as having been accrued in the relevant section of the ‘old’ legacy scheme (referred to as ‘rollback’) and (ii) to maintain a dual (shadow) record with pensionable service over the same window as having been in the replacement ‘new’ CARE scheme. Prior to any revision, usually the pension benefits accrued were in the ‘old’ legacy scheme up to 31 March 2015 and the ‘new’ CARE scheme from 1 April 2015.

The McCloud ruling appears to have caused a big headache for the scheme administrators, who now have to produce ‘McCloud compliant’ CEVs for divorce purposes. In summary, the scheme administrators need to determine which of the two records (the ‘old’ legacy scheme or the ‘new’ CARE scheme) produces the greater CEV in respect of accrual over the 2015–22 window, i.e. which set of benefits is the most valuable based on the position at the date of calculation, and it is this ‘compliant’ CEV that will be used in the pension sharing calculations.

These ‘McCloud compliant’ CEVs were originally meant to be produced from 1 October 2023. However, it soon transpired that the majority of the schemes were not in a position to produce such CEVs from that date. Over a year later, we are finally seeing ‘McCloud compliant’ CEVs being produced by all the public sector schemes for most members!

What this all means is that cases involving public sector pension schemes, for those members that fall under the scope of the McCloud ruling, have become much more complicated (whereas pre-McCloud they tended to be the simplest), especially when it is the affected public sector pension that is to be shared.

We have stated from the outset that we expected the biggest impact of McCloud would be for the uniform public sector schemes (Firefighters, Police and Armed Forces), given these legacy schemes all contain very generous early retirement provisions under the terms of the relevant legacy scheme and McCloud is likely to result in CARE scheme benefits being rolled back into these legacy schemes. This is best shown by a (very simple) worked example.

Let’s consider a hypothetical scenario whereby we have a husband (H) and wife (W) who are the exact same age of 48. The H has been a member of the Police Pension Scheme (PPS) from 1994 onwards (having now attained 30 years’ service in the scheme) and the W has a private sector defined benefit pension of £10,000 pa that is CPI-linked before and after retirement, and payable unreduced from age 60.

The table below summarises the H’s PPS benefits before and after rollback has occurred, and the impact this has on his PPS CEVs.

As you can see, post rollback he has gone from having a PPS 1987 pension of £18,443 pa payable immediately (without reduction) to a PPS 1987 pension of £24,666 pa payable unreduced immediately. It will come as no surprise that this significantly increases the PPS 1987 CEV (by around 34%). Conversely, post rollback his PPS 2015 pension reduces from £8,736 pa to £1,831 pa. Overall the total of the CEVs across both schemes has increased from c.£660k to c.£744k.

What does all this mean in terms of the PSOs? The W is awarded a pension credit calculated by multiplying the CEV by the percentage stated in the Pension Sharing Order (PSO). The table below shows a comparison of the PSOs we would have suggested to equalise incomes from age 60 based upon: a) pre-rollback non-compliant CEVs, that may have been issued in 2023 and b) post-rollback McCloud compliant CEVs, that may have been issued more recently.

As you can see from the table above, a year or so ago we may have suggested a pension sharing solution that involved two PSOs. However, now, with McCloud compliant CEVs, we suggest that there is a single PSO over the PPS 1987 pension of the H, that accounts for around 97% of his PPS pension benefits by value.

The table below shows the amount of pension credit that would be awarded to the W, if the 2023 PSOs are applied to (i) pre-rollback non-compliant CEVs and (ii) post-rollback McCloud compliant CEVs:

It can be seen that if the 2023 PSOs are now applied to McCloud compliant CEVs, the W will end up with a lower amount of pension credit in the PPS (and hence less valuable PPS pension benefits) versus what she would have received had the 2023 PSOs been applied to non-compliant CEVs that were used to derive those PSOs.

So whilst the H’s pension benefits increased in value as a result of McCloud (£660k to £744k), it is possible that the W will receive less valuable PPS pension benefits than anticipated before any McCloud adjustments. Clearly, this cannot be right.

It therefore follows that, in most cases, if PSOs were determined based upon pre-rollback non-compliant CEVs, then these PSOs will not produce equality if implemented using post-rollback McCloud compliant CEVs.

In theory, if PSOs have been determined based upon pre-rollback CEVs, and updated CEVs have not been requested since, then the scheme administrators should use updated pre-rollback CEVs when implementing the PSO(s). However, given that pension administrators are now focused on producing McCloud-compliant CEVs, this may not happen in practice.

The message here is that if you are working with a PODE report that is based on non-compliant CEVs (this is likely to include all reports issued in 2023 and early 2024), there is a real risk that if the PSOs given in that report are now served to the relevant administrator, the outcome may not be the intended outcome and equality may not be achieved. The safest thing to do is to ‘start again’ with compliant CEVs and a new PODE report.