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Public service pensions - the employer cost cap

Published Wednesday, September 19, 2018

Looks at the mechanism introduced under the Public Service Pensions Act 2013 to control unexpected changes in the cost of public service pensions

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Following the reports of the Independent Public Service Pensions Commission, chaired by Lord Hutton of Furness, the Government legislated in the Public Service Pensions Act 2013 for a framework for new public service pension schemes, to be introduced from April 2015 (2014 for local government). The new structure is designed to manage some of the costs and risks to the Exchequer of providing public service pensions. For example, providing benefits based on career average revalued earnings rather than final salary removes much of the ‘salary risk’ and adjusting the normal pension age in line with longevity through linking it to the State Pension age (except for the ‘uniformed services which have a pension age of 60) removes much of the risk of future increases in longevity.

In the course of negotiations, Chief Secretary to the Treasury, Danny Alexander, said that the Government’s proposed reforms would be a “sustainable deal” that would endure for at least 25 years (HC Deb 11 November 2011 c929). Reflecting this, the Act provides for an enhanced consultation and report process in the event of proposed changes to ‘protected elements’ (such as member contributions and benefit accrual rates) within 25 years of 2015 (s22).

However, in line with one of the Commission’s recommendations, the Act also provided for an “employer cost cap” to protect against unforeseen changes in scheme costs, providing “backstop protection to the taxpayer.” The cap will apply to significant unexpected increases in “member costs” i.e. increases in cost relating to assumptions about the profile of members, such as life expectancy, growth in salaries or career paths. Where costs rise above the ceiling, the legislation requires action to bring them back to the target, with an automatic default to be applied if agreement cannot be reached on how to do this. (Public Service Pensions Act 2013, s12; SI 2014/575).

Cost caps for the teachers’, NHS and civil service schemes were set in the actuarial valuations showing the position of the schemes as at the end of March 2012. The financial position of schemes relative to the cap would be considered at each subsequent valuation.

Valuations showing the position of the schemes as at end March 2016 are in the process of being finalised. In September 2018, the Government published a document setting out assumptions that Government departments and the Scottish and Welsh Governments would need to use in finalising them. It said initial results meant scheme benefits would improve:

Our initial results show that the protections in the new cost cap mechanism mean public sector workers will get improved pension benefits for employment over the period April 2019 to March 2023. This test, known as the cost control mechanism, was introduced to offer taxpayers and employees protection from unexpected changes in pension costs. Where the value of the pension scheme to employees has changed from the levels set when reformed pension schemes were introduced in 2015, steps must be taken to return costs to that level. (HC Deb 6 September 2018 c13WS; Gov.UK, Public service pensions 2016 valuations: supplementary documents)

There would be consultation with the relevant scheme advisory board. Where it was not possible to reach agreement on steps to return costs to their target level, the legislation provides that remedy will be delivered by increasing the rate at which pension benefits accrue. Changes would be implemented with effect from April 2019 (Ibid).

The Government asked GAD to review the cost cap mechanism to ensure it was “working as intended and delivering the Government’s objective to protect taxpayers and workers from unforeseen changes in pension costs.” The trade union Prospect objected saying that “the Treasury should accept the results which simply reflect the reality that the reforms to these schemes have worked and the cost have fallen” (Prospect press release, 7 September 2018).

In the same statement on 6 September, the Government announced a reduction in the SCAPE discount rate, which would have the effect of increasing employer contributions – see Library Briefing Paper CBP-7539 (September 2018).

The Labour Government’s proposals for cost capping and sharing arrangements in public service schemes are discussed in SN 5252 (December 2011).

Commons Briefing papers SN06971

Author: Djuna Thurley

Topic: Pensions

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