Treasury proposes changes to public pensions cost control mechanism
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The Treasury is consulting on the cost control mechanism for public sector pension schemes, after the Government Actuary has recommended making some changes to it, such as not allowing employer costs to go up in times of economic stress.
The Government Actuary carried out a review of the cost control mechanism in the public service pension schemes at the request of the Treasury, publishing his final report last week, after the Treasury raised concerns that the mechanism is too volatile and would be triggered more often than in the “extraordinary, unpredictable events” it says it was designed to mitigate.
The government is making three proposals recommended by GAD:
Moving to a reformed scheme only design: to remove any allowance for legacy schemes in the cost control mechanism, so the mechanism only considers past and future service in the reformed schemes. This ensures consistency between the set of benefits being assessed and the set of benefits potentially being adjusted;
Widening the corridor: to widen the corridor from 2% to 3% of pensionable pay. This aims to achieve a better balance between stability and responsiveness of the cost control mechanism; and
Introducing an economic check: the government proposes introducing an economic check so that a breach of the mechanism would only be implemented if it would still have occurred had the long-term economic assumptions been considered.
"The Government believes that these changes will establish a fairer balance of risks between taxpayers and scheme members, and create a more stable mechanism,” the Treasury said.
The introduction of an ‘economic check’ based on assumptions could prove controversial. The government says that “currently the mechanism does not include changes in long-term economic assumptions and therefore cannot consider the actual cost to the government of providing the pension benefits”.
The government argues that
the older Legacy schemes were the driver of the main changes in costs, but benefits can only be amended in the newer Reformed schemes, which would seem to be tending towards intergenerational unfairness
the main changes in costs in the Legacy schemes were in relation to assumed salary increases and life expectancy, saying these two aspects have largely been mitigated in the Reformed schemes
costs would be expected to frequently fluctuate by more than 2%, and therefore regular breaches of the corridor could be expected
it says, “perverse outcomes can occur” as benefit improvements can be granted at the same time as employer costs are increasing.
The cost control mechanism was brought in as part of reforms to public sector schemes that changed them from final salary to career average design, and impacts more than 5m public service workers.
It applies an employer cost cap as well as a cost floor – a concession to unions – that regulate by how much pension contributions can increase or fall, to ensure a fair balance of risk between members and taxpayers. The mechanism assesses certain elements of the costs of each scheme, and if these have changed by more than the ‘corridor’ of +/- 2% of pensionable pay, then member benefits within that scheme are changed to bring the assessed costs back to the original level.
George Georgiou, national officer at the GMB union, said GMB believes the cost cap for controlling costs in the public sector schemes seeks to ensure fairness for scheme members and the taxpayer alike.
"Given the volatility of the factors that affect pensions, e.g. longevity, pay awards, demography and so on, it is only right that costs should operate within a small corridor - with the surpluses and deficits being redistributed as appropriate following agreement," he said.
"Up to now, other than the government outrageously using the surplus to pay its own legal costs of a case it lost, the cost cap has worked well," he added, referring to the Sargeant/McCloud age discrimination case.
"GMB sees no real case for change - other than to ensure the government cannot plunder any surplus to meet its own failures. Surpluses should be repaid in the form of increased benefits or decreased contributions and deficits dealt with analogously," he said.
The cost control mechanism was due to first be tested at the 2016 valuations, but according to the Treasury, provisional results “raised the question of whether the cost control mechanism, as currently designed, is too volatile”.
Pension levels would have had to increase because employer contributions fell as a result of lower than expected longevity increases. The Treasury then decided to pause the mechanism while the government was in court for age discrimination in the Sargeant/McCloud case about protecting older members when public sector schemes changed from final salary to career average. The government lost in court.
The consultation closes at 11.45pm on 19 August.
Do you agree with the proposed changes? David DavisonBob CoppageBarry MckayIan Neale
