Changes Proposed to Public Sector Pensions

On 6th September 2018, HM Treasury published information concerning draft proposals regarding actuarial revaluation of public service pension schemes. HM Treasury undertakes valuations of the public service pension schemes every four years.

The public service pension schemes cover the NHS, teachers, the armed forces, the police, firefighters, local government workers, judiciary and civil servants.

The information published by HM Treasury sets out the framework for the cost cap mechanism which was introduced to offer taxpayers and scheme member’s protection from unexpected changes in pension costs, and intends to set a fair balance of risks between taxpayers and scheme members (for the reformed schemes – the 2015 scheme).

Every public service pension scheme must set a cap (employer cost cap) which is expressed as a percentage of pensionable pay and is a target rate which reflects the cost of benefit accrual. If costs of a scheme exceed the cap by more than two per cent, or fall more than two per cent below the cap, then action must be initiated to ensure that costs return to the target cap. In order to achieve this, adjustments can be made to member benefits or member contributions.

The information published by HM Treasury does not set out the impact of the valuations and the cost control mechanism on the public service pension schemes, but the outcome should be confirmed later this year following a statutory consultation with the Government Actuary. For the time being, HM Treasury has encouraged employee representatives, public service employers and departments to comment on their draft amending valuation directions.

The information published in the draft amending valuation directions stated that there are early indications that there may be cost cap level breaches in at least some of the schemes where the costs measured by the cost cap mechanism have decreased by more than two per cent of pensionable pay threshold. However, the Government’s Actuary Department will confirm later this year whether or not there have in fact been any breaches.

Where a cap has strayed from the set level, Secretaries of State, and Scottish and Welsh Ministers will consult with the appropriate Scheme Advisory Board and attempt to establish a procedure to return costs to their initial level. However, if this is not possible, a default position is set out in legislation which provides that a cap will be restored by increasing the rate at which pension benefits accrue. If the cost cap level has been breached, steps will be taken to ensure that costs are returned to the target levels in respect of employment from 1 April 2019. HM Treasury has therefore stated that scheme members will likely receive improved pension benefits for employment from April 2019 to March 2023.

As a result of this, HM Treasury has called upon the Government Actuary to review the cost cap mechanism and decide whether or not it has reached the Government’s objective to protect taxpayers and scheme members from unforeseen changes in pension costs.

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