The Treasury has tabled proposals that would make it harder for valuations of the civil service pension scheme – and other public sector pension schemes – to trigger changes to member contributions and benefits.
The move follows a report on the so-called cost-control mechanism introduced as part of public sector pensions reforms in 2015, written by government actuary Martin Clarke.
Clarke proposed a selection of changes to the mechanism after concluding that the current system contained flawed elements that put it on course to deliver a “perverse outcome” of reduced contributions and increased benefits that was out of step with reality for scheme members.
The Treasury said its planned changes were all based on Clarke’s recommendations and would “establish a fairer balance of risks between the Exchequer and scheme members, and create a more stable mechanism”.
Under the proposals, the mechanism would only be triggered by costs related to reformed public-sector pension schemes – such as the ones introduced in 2015. The amount of deviation from previous cost projections needed for the trigger to be activated would also rise from 2% of pensionable pay to 3%.
The Treasury is also planning to introduce an “economic check” to the cost-control mechanism process, which would mean the broader economic situation of the nation was taken into account before a triggering of the cost-control mechanism resulted in a change to pension-scheme benefits.
In its consultation document, the Treasury said one example of a situation in which the “economic check” could be activated might be when public-sector pay restraint triggered a correction in scheme members’ favour at the same time that a downturn in long-term economic forecasts made the cost of future pension benefits relatively more expensive.
The Treasury said it was considering using the SCAPE discount rate – short for Superannuation Contributions Adjusted for Past Experience – used for determining the future cost of unfunded public-sector pensions for the “economic check”.
However it said an alternative measure could be expected long-term Gross Domestic Product. The methodology underpinning the SCAPE discount rate is the subject of another ongoing consultation.
The cost-control mechanism is supposed to only be triggered by “extraordinary, unpredictable events”, however HM Treasury said that its current 2% setting meant it was likely to be activated once in every five valuations of the reformed pension schemes.
It said that its proposed widening of the “valuation corridor” to 3% of pensionable pay would see the mechanism triggered “roughly once in every 10 valuations”, or every 40 years.
A 2016 preliminary valuation of public-sector pension funds indicated that the cost-control mechanism was on course to be triggered, in a move that would have reduced civil service pension scheme members’ contributions by around 2% and increased their benefits.
However, then chief secretary to the Treasury Liz Truss enraged civil service unions in early 2019 by pausing the public-sector pensions valuation process in the wake of a Court of Appeal decision that found elements of the government’s 2015 pensions reforms to be discriminatory.
Truss said that the McCloud judgment could have implications for the whole valuations process and could add £4bn a year to the cost of delivering public-sector pensions.
HM Treasury published its proposed McCloud remedy earlier this year. A recent Public Accounts Committee report put the overall bill at £17bn, exclusive of administration costs.
The Treasury’s consultation on its proposed cost-control mechanism changes is open to responses until 11.45pm on 19 August.