Treasury confirms Civil Service Pension Scheme reform plan

Reformed scheme will not have to cover costs for legacy schemes, policy statement says

By Jim Dunton

17 May 2023

Members of the reformed Civil Service Pension Scheme will not have to bear costs of legacy schemes under the government’s fix for its botched 2015 public-sector pensions changes, the Treasury has confirmed.

A policy paper published this week states that the cost-control mechanism for new public-sector pension schemes will exclude costs related to schemes that are closed to new members in their periodic valuations.

The paper said the move, which follows a review by the government actuary and multiple consultations, would mean the exchequer takes on the “full risk” of costs related to unfunded legacy schemes for civil servants, teachers and NHS staff.

“The government believes this is the right approach to take in order to ensure the CCM is fairer to younger members who did not previously have access, or had access for a shorter time, to the legacy schemes,” the policy paper said.

The public-sector pension scheme changes have been forced by a legal challenge to the 2015 reforms that resulted in them being found discriminatory to younger scheme members in the so-called McCloud judgement.

The government’s remedy has been to introduce reformed public-sector schemes that design out the discrimination and allow officials who were members of schemes such as the CSPS between 2015 and 2022 to select which terms they want entitlements for those years to be paid under.

Back in 2021, the cost of the flawed pensions reforms was estimated to be at least £17bn. Much of the fallout has related to how that expense should be covered.

The 2015 schemes included a cost-control mechanism designed to alter members’ contributions and benefits based on periodic valuations. Shortly after the Court of Appeal upheld the High Court’s judgement in the McCloud case, the government announced it was pausing part of its work on the valuation of public-service pensions in light of the financial impact the decision would have.

PCS, the civil service’s biggest union, said the 2016 valuation should have triggered a 2% reduction in contributions from 2019, meaning members had effectively overcontributed to the tune of thousands of pounds in the intervening period. Pensions justice is one strand of the union’s ongoing strike campaign.

PCS general secretary Mark Serwotka said the 2016 valuations had showed that the cost of future public-service pensions had been exaggerated.

“The real determinants are pay levels and life expectancy, both of which point to reducing and not increasing future liabilities, which is why we believe our members have been overpaying for years and should have their money back,” he said.

Chief secretary to the Treasury John Glen said excluding costs related to legacy public-sector pensions schemes was the most sensible option for reformed schemes.

“This will lead to a more stable CCM and ensure consistency between the set of benefits being assessed and the set of benefits potentially being adjusted,” he said in a written ministerial statement on Monday.

Other elements of the reformed CSPS include the introduction of a 3% “cost corridor” and an “economic check” for the cost-control mechanism, which are expected to make it harder for changes to contribution rates or benefits to be triggered.

In March, the government announced proposals to reduce the so-called SCAPE discount rate used for unfunded public-sector pensions from CPI+2.8% to CPI+1.7%. It means that employers’ pension contributions are likely to rise from next April, when changes from the 2020 valuation take effect.

Glen acknowledged this in a statement on 30 March, saying the move would bring “cost pressure” to departmental budgets. But he added that the government had committed to providing funding for increases in employer-contribution rates for employers whose staff costs are centrally funded.

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