The real cost of McCloud

When pension reform backfires, everyone pays the price. The McCloud remedy, initially designed to reduce public sector pension costs, has instead created an administrative nightmare that’s driving up expenses and leaving members frustrated. What started as a well-intentioned cost-saving measure has morphed into a perfect storm of technical limitations, staffing challenges, and member confusion. Traditional pension management platforms simply weren’t built to handle these dual calculations, creating a cascade of costly problems. Mantle’s Graeme Riddoch discusses the true impact of McCloud on pension schemes and those who depend on them.

What is the McCloud Remedy?

What most people know about the McCloud remedy is that it’s a Public Sector Defined Benefits (DB) Pensions issue that impacts some members. At its heart were reforms designed to curb the cost of Public Sector Pensions by changing accrual to Career Average.  This generally produces lower benefits than Final Salary, thus saving money.

Ultimately, a judge found the changes to be discriminatory and the upshot in simple terms is that both career average and final salary calculations need to be run. LGPS members are presented with “the better of” for their circumstances. Local Government members get both calculations and choose.

So what started out as an exercise designed to reduce costs has had the opposite effect.

What is the impact of the McCloud remedy?

One of the biggest problems is having to run both career average and final salary calculations. The platforms running the schemes were set up for final salary calculations, not career average. Some legacy platforms struggle to fully automate one set of calculations never mind both!

A huge amount of money is therefore being burnt just in this area. We recently came across one large scheme having to run career average calculations on spreadsheets and then manually merge the results with the Final Salary calculations. The net effect was to pretty much double the number of staff required to support the scheme, with the accompanying cost.

Consider serving data to Pensions Dashboards, some platforms struggle with one ERI calculation, never mind two.

The other real-world impact of McCloud is on members. If you can’t automate calculations then getting estimates of benefits is a long painful process. Also, forget member self-serve.

Communication is a real issue, just go on the LGPS website and look at how much copy is dedicated to trying to explain things to members. DB pensions are complicated enough to start with!

There are even more fundamental consequences. The BBC ran a story recently about people unable to get a divorce. The barrier being an inability of the actuary to value the benefits to allow for a pension sharing order.

The problems of a large LGPS fund in the Midlands are well documented with Martin Lewis wading in. The fund in question was struggling so badly that some members hadn’t received their pension 5 months after retirement.

So what’s the remedy? Well, the technology underpinning many schemes isn’t up to the job. To be fair the platforms were never designed to run parallel calculations. Few are capable of calculating Transfer Values, on one basis, never mind two.

Better is possible however. Mantle’s pension management platform runs both career average and final salary in real time. It also supports dual opposite sex records for GMP as well as live transfer values, refreshed daily.

And the cost? Well for one scheme we estimated a 50% reduction in staff costs and a transformation in terms of the service to the member. That’s the real cost of McCloud!

How Mantle’s Pension Management Platform can help.

By upgrading to modern pension management technology platforms designed to handle dual calculations effortlessly, schemes can dramatically reduce operational costs while delivering superior service to members.

Explore how Mantle’s real-time calculation capabilities can transform your scheme administration, cut costs by up to 50%, and give your members the responsive service they deserve. Contact us today at enquiries@mantleservices.com to learn how we can help you navigate the McCloud challenge more efficiently.